LLC Taxes: 2024 Guide

You’ve set up your LLC — now it’s time to handle taxes. But how exactly does LLC taxation work? What rates apply? What options do you have when filing?

As an LLC owner, you have flexibility in how your business is taxed. Since the IRS doesn’t recognize LLCs as a separate tax category, you’ll need to choose how your business will be treated for federal tax purposes. Whether you’re a single-member LLC or have multiple partners, let’s break down what you need to know.

How LLCs are Taxed

To understand how your LLC is taxed, you must first make sense of how your business is classified. Unlike corporations, LLCs don’t have a fixed tax structure under federal law. Instead, the IRS treats them as either sole proprietorships or partnerships by default, depending on the number of owners. However, you can also elect to be taxed as an S Corporation or C Corporation if that aligns better with your financial goals.

Default Taxation for LLCs

• Single-Member LLCs: If you’re the sole owner, the IRS disregards your LLC as a separate entity for tax purposes. Instead of filing a business tax return, you’ll report all income and expenses on Schedule C, which is attached to your personal Form 1040.
• Multi-Member LLCs: If your LLC has more than one owner, it’s automatically treated as a partnership. The business itself doesn’t pay taxes directly. Instead, each owner reports their share of profits and losses on their personal tax return using Schedule K-1, and the LLC must also file Form 1065 to report earnings to the IRS.

LLC Tax Election Options

While LLCs default to sole proprietorship or partnership taxation, they can elect to be taxed as an S Corp or C Corp for potential tax benefits.

Electing S Corp Status

LLCs can opt for S Corporation taxation by filing Form 2553 with the IRS. This allows the business’s income to be split into:

• Owner salaries: Subject to income tax and self-employment tax (15.3%). The IRS requires salaries to be “reasonable” based on industry standards.
• Distributions: Profits left after salaries and expenses can be distributed to owners. These aren’t subject to self-employment tax, reducing the overall tax burden.

Electing C Corp Status

Choosing to be taxed as a C Corporation means filing Form 8832 and submitting an annual Form 1120 tax return. Unlike LLCs and S Corps, C Corps face double taxation: the corporation pays a flat 21% corporate tax on profits, and shareholders pay individual income tax on dividends.

Despite this extra tax layer, structuring as a C Corp can sometimes result in lower overall tax liability, depending on the business’s size and financial strategy.

How LLCs pay taxes

By default, LLCs benefit from pass-through taxation, meaning that the business itself doesn’t pay federal income taxes. Instead, profits and losses “pass-through” to the owners, who report them on their personal tax returns. This differs from C Corporations, which are taxed separately at the corporate level before distributing dividends that are taxed again.

However, LLC owners still have multiple tax obligations that impact their total liability, including self-employment taxes, federal/state/local income taxes, and estimated taxes.

Self-Employment Taxes (15.3%)

Since LLC owners aren’t considered employees of their business, they don’t receive W-2 paychecks with payroll tax withholdings. Instead, they’re responsible for covering both the employer and employee portions of Social Security and Medicare taxes, which total 15.3% of net earnings:

• 12.4% for Social Security (on the first $168,600 of earnings for 2024).
• 2.9% for Medicare (applies to all net earnings).
• Additional 0.9% Medicare tax on earnings exceeding $200,000 (single filers) or $250,000 (married filing jointly).

These taxes apply to all net business income for sole proprietors and multi-member LLC members unless the LLC elects S Corporation taxation, in which case only the salary portion (not distributions) is subject to self-employment taxes.

Federal, State, and Income Taxes

LLC owners must also pay federal, state, and local income taxes on their share of the LLC’s profits.

• Federal Income Tax: Pass-through LLC income is taxed at the owner’s personal tax rate, which follows the IRS’s marginal tax brackets (ranging from 10% to 37% in 2024).
• State Income Tax: Most states tax LLC profits at personal income tax rates, which vary by state. Some states, like Texas and Florida, don’t impose state income taxes on LLC owners, while others, like California, charge an annual franchise tax (minimum $800).
• Local Taxes: Certain cities or municipalities may impose local income taxes on LLC earnings.

Quarterly Estimated Taxes

Since LLC profits pass through to the owner, taxes aren’t withheld from earnings automatically. To avoid penalties, LLC owners who expect to owe $1,000 or more in federal taxes must pay estimated taxes quarterly using Form 1040-ES.

Each estimated payment should cover income tax and self-employment tax liabilities based on projected earnings. If owners underpay, they may face IRS penalties and interest on unpaid amounts.

LLC Payroll Taxes 

If a Limited Liability Corporation has employees, it will need to pay payroll taxes.  Keep in mind that this does not apply to single-member LLCs or multi-member LLCs without any non-ownership employees.

For employees, the LLC is responsible for paying half of the 15.3% FICA/Medicare/Social Security.  The employee pays the other half out of their paycheck.

State Taxes & Fees

In addition to state income taxes, LLCs may be responsible for state franchise taxes, annual filing fees, and sales taxes, depending on the state where they operate. Franchise taxes are charged by some states as a cost of doing business, either as a flat fee (e.g., $300 in Delaware) or based on revenue (e.g., California’s sliding scale starting at $900). Many states also require annual or biennial report filings, which come with a fee to keep the LLC in good standing.

If an LLC sells taxable goods or services, it may need to collect and remit sales tax to the state. Sales tax rates and requirements vary, but generally, LLCs must register for a sales tax permit if they have a physical presence (like a store or warehouse) or economic nexus (exceeding a certain revenue threshold in a state). Even if an LLC is not based in a state, it may still be required to collect sales tax on online sales to customers in states where it meets the economic nexus rules.

LLC Tax Forms and Deadlines

Frequently Asked Questions

Is an LLC better for Taxes?

A Limited Liability Corporation is a legal entity formed to protect the owner’s assets in a legal matter pertaining to the business.  However, there are certain situations, such as the Jobs Act, that provide tax deductions for LLCs. 

How much does an LLC get taxed?

Taxes depend on how the LLC is structured:

• Sole proprietorships & partnerships: Pay federal, state, local, and self-employment tax.
• S Corps: Pay federal, state, and local taxes, but self-employment tax only applies to wages, not distributions.
• C Corps: Pay corporate tax (21%) and dividend tax on distributions.

Does an LLC save money on taxes? 

There is a tax deduction through the Jobs Act.  Additionally, many business expenses can be deducted from taxable income.  Finally, filing as an S-Corp could potentially reduce some Self-Employment Taxes by earning through a distribution rather than a paycheck.

How often does an LLC pay taxes? 

LLCs file taxes annually. LLCs can file estimated taxes quarterly based on the previous year’s earnings or actual quarterly earnings. Then, when it comes time to do taxes at the end of the year, the total quarterly payments will be deducted from the total tax expense. If the quarterly payments were greater than the total for the year, the LLC will be refunded the difference. 

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