How is an LLC taxed by default?

By default, the IRS does not recognize an LLC as a separate tax entity. A single-member LLC is taxed as a 'disregarded entity' — all income and expenses flow to the owner's personal Form 1040 via Schedule C, exactly like a sole proprietorship. The owner pays self-employment tax (15.3% on the first $168,600 of net profit in 2024, then 2.9% Medicare on income above that) plus ordinary income tax. A multi-member LLC is taxed as a partnership by default: the LLC files Form 1065 and issues a Schedule K-1 to each member, who then reports their share of income on their personal return. In both cases, the LLC itself pays no federal income tax.

What is S-Corp election and how does it reduce taxes?

S-Corp election is a federal tax classification you apply for by filing IRS Form 2553. Your LLC remains an LLC under state law — the election is purely a federal tax change. Under S-Corp taxation, the owner must pay themselves a 'reasonable salary' via payroll, which is subject to the full 15.3% self-employment tax (split as FICA between employer and employee). The remaining profit above the salary is treated as a distribution, which is exempt from self-employment tax. On $100,000 of net profit with a $50,000 salary, for example, you save self-employment tax on the $50,000 distribution — roughly $5,000–$7,000 in annual savings depending on your income. The tradeoff is payroll service costs ($500–$2,000/yr) and additional accounting complexity.

When does S-Corp election save money?

S-Corp election typically saves money when your LLC's annual net profit consistently exceeds $60,000–$80,000. Below that threshold, the cost of running payroll (typically $500–$2,000/year through a payroll service), filing Form 1120-S annually, paying an accountant for the more complex return, and managing quarterly payroll tax deposits often exceeds the self-employment tax savings. The exact breakeven depends on your state (California's S-Corp minimum franchise tax of $800 plus 1.5% net income tax shifts the math), your salary level (IRS expects a 'reasonable' salary, typically 40–60% of net profit), and your accountant's fees. Use our LLC vs Corp Tax Calculator to run the numbers for your specific situation.

Does an LLC pay state income taxes?

It depends on the state. Most states tax LLC income as pass-through income on the owner's personal state return. However, many states impose additional LLC-level taxes. California charges an $800/yr minimum franchise tax plus a 1.5% net income tax on S-Corp elections. New York charges a filing fee based on gross income ($25–$4,500). Texas imposes a franchise (margin) tax on LLCs with revenue above $2.65M (2026 threshold). Ohio, Wyoming, Nevada, and several other states have no personal income tax, making pass-through LLC income entirely state-tax-free for residents. Your state's LLC tax burden can vary significantly from the federal picture — always check your specific state's rules.

How do I change my LLC's tax classification?

To elect S-Corp status, file IRS Form 2553 signed by all members. You must file within 75 days of your LLC's formation date, or by March 15 of the tax year in which you want the election to take effect. Late election relief is available in many cases by filing with a statement explaining the failure to file timely. To elect C-Corp status (less common), file IRS Form 8832 (Entity Classification Election). To revert from S-Corp back to default LLC taxation, file a revocation statement signed by shareholders holding more than 50% of shares. Revoking mid-year creates income allocation complications, so consult a tax professional. All of these elections affect only federal taxation — your state filing status may require a separate step.

Taxes

How Is an LLC Taxed? Complete Guide for 2026

An LLC is a legal structure, not a tax classification. By default, the IRS taxes a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. But you can elect to be taxed as an S-Corp or C-Corp instead — and each option has a different tax bill. Here is how each one works and how to pick the right one.

By Edmond Hui · Last updated: July 2026

Edmond Hui · Founder, MyStateLLC

Edmond Hui is a software engineer and serial entrepreneur based in New York who has founded multiple online businesses across e-commerce, media, and information publishing. Before transitioning into tech, he spent years as a commercial real estate professional closing deals totaling over 100,000 square feet, giving him firsthand experience with business formation and entity structuring. He built MyStateLLC to provide the free, state-specific LLC guidance he wished existed when forming his own companies.

Quick answer: Single-member LLC? You pay 15.3% SE tax on all net profit plus income tax — same as a sole proprietor — via Schedule C. Once profit exceeds $60K–$80K/yr, S-Corp election typically saves $3K–$10K/yr in SE tax by exempting distributions from that tax.

The Four Ways an LLC Can Be Taxed

Classification	Tax Return	SE Tax	Best For	Downside
Disregarded Entity (default — 1 member)	Schedule C on Form 1040	15.3% on all net profit	Simple; no separate business return	No SE tax savings at any income level
Partnership (default — 2+ members)	Form 1065 + K-1 per member	15.3% on each member's distributive share	Required for multi-member LLCs by default	More complex return; K-1s for each member
S-Corp Election (Form 2553)	Form 1120-S + W-2 for owner-employee	15.3% on salary only; distributions exempt	Reduces SE tax when profit > $60K–$80K/yr	Payroll required; $500–$2K/yr in added costs
C-Corp Election (Form 8832)	Form 1120 annually	N/A — paid via salary; corporate tax at 21%	Venture capital, retained earnings, QSBS	Double taxation on dividends; rarely optimal for small LLCs

Default Pass-Through Taxation (Most LLCs)

When you form an LLC and do nothing else, the IRS uses default classification. For a single-member LLC, that means you file a Schedule C on your personal Form 1040 and pay:

Self-employment tax: 15.3% on the first $168,600 of net profit (2024), then 2.9% Medicare on income above that
Income tax: 10–37% at your personal marginal rate on net profit
State income tax: varies by state (0% in TX/FL/WY/NV; up to 13.3% in CA)

The LLC itself pays no federal income tax — all profit flows to the owner's personal return. This is the same tax treatment as a sole proprietorship. The LLC's value is in liability protection, not tax reduction, at the default classification level.

S-Corp Election: The Tax Math

Here is a concrete example using an LLC with $120,000 in revenue and $20,000 in business expenses:

Default LLC (Disregarded Entity)

Net profit	$100,000
SE tax (15.3% × 92.35%)	$14,130
Payroll costs	$0
Total SE + payroll cost	$14,130

With S-Corp Election

Net profit	$100,000
Reasonable salary	$50,000
Distribution (SE-tax-free)	$50,000
SE tax on salary only	$7,065
Payroll service cost	$1,500
Total SE + payroll cost	$8,565

Estimated annual savings: $5,565

Note: This is a simplified illustration. Actual savings depend on your state, exact salary, and accountant fees. Use the LLC vs Corp Tax Calculator for a personalized estimate.

How common is the S-corp path? The IRS counted 5.3 million active S-corporation returns for tax year 2022, averaging $144,924 in business net income per return — but only about 66% reported a net profit that year, underlining that the election earns its keep only once profit is consistent. See the full S-corp statistics → (Source: IRS Statistics of Income, Form 1120-S, tax year 2022.)

C-Corp Election: When Investors Require It

C-Corp election (via IRS Form 8832) is rarely the right choice for an operating small business LLC. The 21% flat corporate tax rate sounds attractive until profits are distributed as dividends — which are taxed again at the shareholder level (qualified dividend rate of 15–20%), creating double taxation that exceeds the default pass-through rate for most income levels.

The scenarios where C-Corp structure makes sense are specific: (1) you are raising institutional venture capital and investors require preferred stock structures; (2) you want access to the IRC Section 1202 Qualified Small Business Stock exclusion, which allows qualifying shareholders to exclude up to $10 million in capital gains from federal tax; or (3) you have significant retained earnings you want to keep inside the company and reinvest at the 21% corporate rate. For most small business LLCs, these conditions do not apply, and C-Corp election adds cost and complexity without benefit.

State-Level Tax Variations

Federal LLC taxation is uniform across the U.S., but state taxes vary significantly. Some states impose additional LLC-level fees or taxes regardless of your federal classification.

California

$800/yr minimum franchise tax, plus 1.5% net income tax on S-Corp election. One of the most expensive states for LLC owners.

New York

LLC filing fee based on gross income ($25–$4,500). S-Corps pay a fixed-dollar tax plus 1.5% of business income.

Texas

No personal state income tax. Franchise tax (margin tax) applies to LLCs with revenue above $2.65M (2026 threshold) at 0.375%–0.75%.

Florida

No personal state income tax. LLC owners pay no state income tax on pass-through income.

Wyoming

No state income tax, no franchise tax. One of the lowest-cost states for LLC ownership.

Nevada

No state income tax. Commerce tax applies to businesses with revenue above $4M at 0.051%–0.331%.

For your state's complete picture: view state-specific LLC guides →

Frequently Asked Questions

: By default, the IRS does not recognize an LLC as a separate tax entity. A single-member LLC is taxed as a 'disregarded entity' — all income and expenses flow to the owner's personal Form 1040 via Schedule C, exactly like a sole proprietorship. The owner pays self-employment tax (15.3% on the first $168,600 of net profit in 2024, then 2.9% Medicare on income above that) plus ordinary income tax. A multi-member LLC is taxed as a partnership by default: the LLC files Form 1065 and issues a Schedule K-1 to each member, who then reports their share of income on their personal return. In both cases, the LLC itself pays no federal income tax.
: S-Corp election is a federal tax classification you apply for by filing IRS Form 2553. Your LLC remains an LLC under state law — the election is purely a federal tax change. Under S-Corp taxation, the owner must pay themselves a 'reasonable salary' via payroll, which is subject to the full 15.3% self-employment tax (split as FICA between employer and employee). The remaining profit above the salary is treated as a distribution, which is exempt from self-employment tax. On $100,000 of net profit with a $50,000 salary, for example, you save self-employment tax on the $50,000 distribution — roughly $5,000–$7,000 in annual savings depending on your income. The tradeoff is payroll service costs ($500–$2,000/yr) and additional accounting complexity.
: S-Corp election typically saves money when your LLC's annual net profit consistently exceeds $60,000–$80,000. Below that threshold, the cost of running payroll (typically $500–$2,000/year through a payroll service), filing Form 1120-S annually, paying an accountant for the more complex return, and managing quarterly payroll tax deposits often exceeds the self-employment tax savings. The exact breakeven depends on your state (California's S-Corp minimum franchise tax of $800 plus 1.5% net income tax shifts the math), your salary level (IRS expects a 'reasonable' salary, typically 40–60% of net profit), and your accountant's fees. Use our LLC vs Corp Tax Calculator to run the numbers for your specific situation.
: It depends on the state. Most states tax LLC income as pass-through income on the owner's personal state return. However, many states impose additional LLC-level taxes. California charges an $800/yr minimum franchise tax plus a 1.5% net income tax on S-Corp elections. New York charges a filing fee based on gross income ($25–$4,500). Texas imposes a franchise (margin) tax on LLCs with revenue above $2.65M (2026 threshold). Ohio, Wyoming, Nevada, and several other states have no personal income tax, making pass-through LLC income entirely state-tax-free for residents. Your state's LLC tax burden can vary significantly from the federal picture — always check your specific state's rules.
: To elect S-Corp status, file IRS Form 2553 signed by all members. You must file within 75 days of your LLC's formation date, or by March 15 of the tax year in which you want the election to take effect. Late election relief is available in many cases by filing with a statement explaining the failure to file timely. To elect C-Corp status (less common), file IRS Form 8832 (Entity Classification Election). To revert from S-Corp back to default LLC taxation, file a revocation statement signed by shareholders holding more than 50% of shares. Revoking mid-year creates income allocation complications, so consult a tax professional. All of these elections affect only federal taxation — your state filing status may require a separate step.

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