LLC Formation Cost by State: Complete 2026 Comparison

LLC Taxes Explained: A Complete Guide for Small Business Owners

One of the most common questions new LLC owners ask is straightforward: how does my LLC get taxed? The answer, however, depends on how your LLC is structured, how many members it has, and whether you've made any special elections with the IRS. Next Step Filings is a compliance-first business services company based in Glen Allen, Virginia, that has processed over 20,000 state filings across 12 U.S. states with a 99.8% success rate. While Next Step Filings does not provide tax advice, this guide breaks down the four ways an LLC can be taxed so you can have informed conversations with your CPA and make better decisions for your business.

"Most of the businesses we help believed they were fully compliant. They weren't being careless; they were just using outdated information," says Lisa Matthews, General Manager and Business Compliance Advisor at Next Step Filings. LLC taxes are one of the most misunderstood areas for small business owners, and the confusion often starts with a basic misconception: that the LLC itself determines how you're taxed. It doesn't. The IRS treats an LLC differently depending on the number of members and any tax elections you file.

How LLCs Are Taxed: The 4 Options

The IRS does not have a specific tax classification for LLCs. Instead, it allows LLCs to choose from four different tax treatments. By default, the IRS assigns one of the first two classifications based on how many members the LLC has. The other two require a formal election.

Each classification carries different obligations for reporting, self-employment tax, and estimated payments. Understanding these differences is the first step toward managing your LLC's tax burden effectively.

Single-Member LLC Taxes: Disregarded Entity

If your LLC has one owner, the IRS treats it as a "disregarded entity" by default. This means the IRS does not recognize the LLC as a separate taxpayer. All business income and expenses pass through to your personal tax return.

Here is how it works in practice:

• You report all LLC income and expenses on Schedule C (Profit or Loss from Business), which is attached to your personal Form 1040.
• You pay income tax on your net business profit at your individual tax rate.
• You also pay self-employment tax of 15.3% on your net earnings (12.4% for Social Security and 2.9% for Medicare).
• If your net profit exceeds $200,000 ($250,000 for married filing jointly), you owe an additional 0.9% Medicare surtax.

The simplicity of disregarded entity taxation is its main advantage. There is no separate business tax return to file. However, the self-employment tax can add up quickly. On $100,000 of net profit, you would owe approximately $15,300 in self-employment tax alone, on top of your regular income tax.

Next Step Filings helps single-member LLC owners stay compliant with state filing obligations so their business remains in good standing. When your LLC is properly maintained, you avoid disruptions that can complicate tax filing, such as administrative dissolution or a lapsed registered agent.

Key Deadlines for Single-Member LLCs

• April 15: Personal tax return (Form 1040 with Schedule C) is due.
• Quarterly estimated taxes: Due April 15, June 15, September 15, and January 15 of the following year.

Multi-Member LLC Taxes: Partnership Taxation

When an LLC has two or more members, the IRS treats it as a partnership by default. Partnership taxation introduces a layer of complexity that single-member LLCs do not face.

Here is the key difference: a multi-member LLC must file its own informational tax return, Form 1065 (U.S. Return of Partnership Income). The LLC itself does not pay taxes on this return. Instead, each member receives a Schedule K-1 that reports their share of the LLC's income, deductions, and credits.

Each member then reports the K-1 information on their personal tax return and pays:

• Individual income tax on their share of LLC profits.
• Self-employment tax of 15.3% on their share of net earnings (for active members).

Profit distribution in a multi-member LLC does not have to be split equally. Your LLC operating agreement should define how profits and losses are allocated among members. The IRS generally respects these allocations as long as they have "substantial economic effect."

Key Deadlines for Multi-Member LLCs

• March 15: Form 1065 (partnership return) is due.
• March 15: Schedule K-1 must be distributed to each member.
• April 15: Each member files their personal return with K-1 information.
• Quarterly estimated taxes: Each member pays estimated taxes individually on the same schedule as single-member LLCs.

Late filing penalties for Form 1065 are steep: $220 per partner per month (for 2024 returns), up to 12 months. An LLC with four members that files three months late could face $2,640 in penalties before any tax is even calculated.

S-Corp Tax Election for LLCs

The S-Corp election is not a business structure. It is a tax classification that an LLC can elect by filing IRS Form 2553. This is one of the most effective tax strategies available to LLC owners, and it is widely underused.

Here is why the S-Corp election matters: when your LLC is taxed as a disregarded entity or partnership, you pay self-employment tax of 15.3% on all net earnings. With S-Corp taxation, only the salary you pay yourself is subject to payroll taxes (Social Security and Medicare). The remaining profits, distributed as "distributions," are not subject to self-employment tax.

Worked Example: S-Corp Tax Savings

Our LLC vs S-Corp guide covers the structural and tax differences in full detail. The S-Corp election typically makes sense when your LLC nets $50,000 to $60,000 or more per year. Below that threshold, the additional costs of running payroll, filing Form 1120-S, and maintaining S-Corp compliance may outweigh the tax savings.

For a detailed walkthrough of the election process, deadlines, and late election relief, see the Next Step Filings guide on how to elect S-Corp status for your LLC using Form 2553.

S-Corp Election Requirements

• File IRS Form 2553 no later than two months and 15 days into the tax year you want the election to take effect.
• Pay yourself a "reasonable salary" for the work you perform. The IRS scrutinizes unreasonably low salaries.
• Run payroll (including withholding for Social Security, Medicare, and income taxes).
• File Form 1120-S annually by March 15.
• Issue Schedule K-1 to each shareholder.

C-Corp Tax Election for LLCs

An LLC can also elect to be taxed as a C-Corporation by filing IRS Form 8832 (Entity Classification Election). This option is less common for small businesses, but it makes sense in specific situations.

With C-Corp taxation, the LLC pays corporate income tax at the flat federal rate of 21% on its profits. When those profits are then distributed to members as dividends, the members pay tax again on the dividends at their individual rate. This is commonly called "double taxation."

When C-Corp Election Makes Sense

• Venture capital or outside investors: Many investors prefer or require C-Corp structure.
• Reinvesting profits: If you plan to reinvest most profits in the business rather than distributing them, the 21% corporate rate may be lower than your personal rate.
• Qualified Small Business Stock (QSBS): C-Corps may qualify for Section 1202 exclusion, which can eliminate capital gains tax on stock held for five or more years.
• Employee benefits: C-Corps have more flexibility with deductible fringe benefits.

For most small business owners, C-Corp taxation creates unnecessary complexity. The LLC vs C-Corp comparison guide from Next Step Filings covers the decision in more detail.

Self-Employment Tax: The 15.3% Reality

Self-employment tax is one of the biggest surprises for new LLC owners. Unlike W-2 employees, who split FICA taxes with their employer (each paying 7.65%), LLC owners who are taxed as disregarded entities or partnerships pay the full 15.3% themselves.

Here is the breakdown:

• Social Security tax: 12.4% on net earnings up to $168,600 (2024 cap; adjusted annually for inflation).
• Medicare tax: 2.9% on all net earnings, with no income cap.
• Additional Medicare tax: 0.9% on net earnings above $200,000 (single) or $250,000 (married filing jointly).

The self-employment tax is in addition to your regular federal and state income tax. For many LLC owners, self-employment tax represents the single largest tax expense.

You can deduct 50% of your self-employment tax on your personal return (the "employer-equivalent" portion), which reduces your adjusted gross income. But the deduction only reduces your income tax, not the self-employment tax itself.

Quarterly Estimated Tax Payments

LLC owners generally do not have taxes withheld from their income the way W-2 employees do. Instead, the IRS requires you to make quarterly estimated tax payments throughout the year.

Estimated tax payments cover both income tax and self-employment tax. If you do not make these payments (or underpay), the IRS charges an estimated tax penalty.

Quarterly Estimated Tax Schedule

The IRS requires estimated payments if you expect to owe $1,000 or more in taxes for the year. The safest approach is to pay at least 100% of your prior year's tax liability (110% if your adjusted gross income exceeds $150,000) through quarterly payments.

Use IRS Form 1040-ES to calculate and submit your quarterly estimated payments.

State-Level LLC Taxes

Federal taxes are only part of the picture. Depending on where your LLC is formed and where it operates, you may owe state taxes as well. State tax requirements vary dramatically. Next Step Filings operates across 12 U.S. states and helps LLC owners stay on top of state-specific filing obligations.

Types of State Taxes That May Apply to Your LLC

• State income tax: Most states tax LLC income at the owner level, similar to the federal pass-through treatment. However, some states (like California) impose an additional LLC fee or franchise tax on the entity itself.
• Franchise tax: Several states charge a franchise tax simply for the privilege of doing business in the state. Texas charges a franchise tax with a no-tax-due threshold of $2.47 million in revenue. California charges an $800 annual franchise tax regardless of income.
• Gross receipts tax: Some states (Ohio, Nevada, Washington, Oregon) impose a tax based on gross receipts rather than net income.
• Sales tax: If your LLC sells taxable goods or services, you are responsible for collecting and remitting state and local sales tax.
• Annual report fees: Most states require an annual or biennial report with a filing fee. Missing this filing can lead to administrative dissolution under statutes like Virginia Code S 13.1-1062 or RCW 23.95.610 in Washington state.

State Tax Highlights for LLC Owners

States without income tax (Texas, Florida, Wyoming, Nevada, Washington) still impose other obligations. Do not assume "no state income tax" means "no state taxes." For a full breakdown of every state's fees, see our LLC formation cost by state guide. Lisa Matthews notes: "State filing requirements aren't hard. They're just unforgiving."

Common Tax Deductions for LLCs

LLC owners can deduct ordinary and necessary business expenses to reduce their taxable income. These deductions apply regardless of your LLC's tax classification.

Frequently Used LLC Deductions

• Home office deduction: If you use part of your home exclusively and regularly for business, you can deduct a portion of rent, mortgage interest, utilities, and insurance. The simplified method allows $5 per square foot, up to 300 square feet ($1,500 maximum).
• Vehicle expenses: Deduct actual business-use vehicle expenses or use the IRS standard mileage rate (67 cents per mile for 2024).
• Health insurance premiums: Self-employed LLC owners can deduct 100% of health insurance premiums for themselves, their spouse, and dependents.
• Retirement contributions: Contributions to a SEP-IRA (up to 25% of net self-employment income, max $69,000 for 2024) or Solo 401(k) are deductible.
• Business insurance: General liability, professional liability, and other business insurance premiums are deductible.
• Professional services: Fees for accountants, attorneys, registered agents, and compliance services (like those provided by Next Step Filings) are deductible business expenses.
• Software and subscriptions: Business-related software, tools, and subscriptions are deductible.
• Education and training: Courses, certifications, and training that maintain or improve skills required in your current business are deductible.
• Startup costs: Up to $5,000 in startup costs can be deducted in your first year of business. Amounts over $5,000 are amortized over 15 years.

Keep detailed records and receipts for all deductions. The IRS can disallow deductions without adequate documentation.

Tax Deadlines Every LLC Owner Should Know

Missing a tax deadline triggers penalties and interest. Here is a consolidated calendar of the most important federal tax deadlines for LLC owners.

State deadlines vary. Your annual renewal or annual report deadline is separate from tax deadlines but equally important. An LLC that falls out of good standing with the state can face administrative dissolution, which complicates everything from banking to contract enforcement. Next Step Filings processes state filings within 24 to 48 hours and maintains a 99.8% success rate across all 12 states served.

When to Hire a CPA

Not every LLC owner needs a CPA from day one. But there are clear signals that professional tax help is worth the investment.

Consider hiring a CPA when:

• Your LLC nets more than $50,000 per year and you're considering an S-Corp election.
• You have a multi-member LLC and need to file Form 1065.
• You operate in multiple states and need to navigate different state tax obligations.
• You are unsure whether you're making the right estimated tax payments.
• You want to maximize deductions without triggering an audit.
• Your business has employees (payroll tax compliance adds significant complexity).
• You received an IRS notice or are facing a potential audit.

A good CPA pays for themselves through tax savings and penalty avoidance. When interviewing CPAs, ask whether they have experience with LLCs specifically, and whether they are familiar with your state's tax requirements.

"Compliance doesn't slow down a startup. Unmanaged regulatory debt does," says Lisa Matthews. The same principle applies to tax compliance. Getting your LLC's tax structure right early prevents costly corrections later.

How Next Step Filings Supports LLC Tax Compliance

Next Step Filings is a private business services company, not a tax firm. We do not prepare tax returns or provide tax advice. What we do is ensure your LLC remains in good standing with the state, which is a prerequisite for clean tax filing.

Here is how Next Step Filings supports your LLC's compliance foundation:

• LLC Formation: Proper formation establishes your tax classification from day one. Next Step Filings handles state filings with 24 to 48 hour turnaround.
• Annual Renewals: Missing your annual report can trigger administrative dissolution under state statutes. We file on time so your LLC stays in good standing.
• EIN Assistance: Your Employer Identification Number is required for tax filing, bank accounts, and hiring. We help you obtain one.
• Registered Agent Service: A registered agent receives official state and legal correspondence on your behalf, including tax notices.
• Reinstatement: If your LLC has been dissolved for missed filings, we handle the reinstatement process so you can get back to business.

With over 20,000 filings processed across 12 states, Next Step Filings provides the compliance backbone that lets you focus on running your business and working with your tax professional.

Frequently Asked Questions About LLC Taxes

How much tax does an LLC pay?

An LLC does not pay a fixed tax rate. By default, LLC income passes through to the owner's personal tax return and is taxed at the owner's individual income tax rate (10% to 37% for federal income tax in 2024). In addition, LLC owners pay 15.3% in self-employment tax on net earnings. The total effective tax rate depends on your income level, deductions, filing status, and state taxes. An LLC that elects S-Corp status can reduce self-employment tax by paying a reasonable salary and taking remaining profits as distributions.

Do LLCs file their own tax returns?

It depends on the tax classification. A single-member LLC (disregarded entity) does not file a separate return. Income is reported on Schedule C attached to the owner's Form 1040. A multi-member LLC files Form 1065 as an informational return, but the LLC itself does not pay tax. LLCs electing S-Corp status file Form 1120-S, and those electing C-Corp status file Form 1120. In the S-Corp and partnership cases, each member also receives a Schedule K-1 to report on their personal return.

Can an LLC be taxed as an S-Corp?

Yes. An LLC can elect S-Corp tax status by filing IRS Form 2553. This does not change the LLC's legal structure. It only changes how the IRS taxes the LLC's income. The election must be filed no later than two months and 15 days into the tax year. S-Corp election is most beneficial for LLC owners with net income above $50,000 to $60,000 per year, where the self-employment tax savings outweigh the cost of running payroll and filing Form 1120-S. Next Step Filings provides a detailed guide on the Form 2553 S-Corp election process.

What is the self-employment tax rate for LLC owners?

The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security (on net earnings up to $168,600 in 2024) and 2.9% for Medicare (on all net earnings with no cap). LLC owners with net earnings above $200,000 (single) or $250,000 (married filing jointly) owe an additional 0.9% Medicare surtax. Self-employment tax applies to LLC owners who are taxed as disregarded entities or partnerships. It does not apply to distributions received by owners of LLCs that have elected S-Corp status.

Do I need to pay quarterly estimated taxes for my LLC?

In most cases, yes. The IRS requires estimated tax payments if you expect to owe $1,000 or more in federal taxes for the year. Since LLC owners do not have taxes withheld from their income (as W-2 employees do), quarterly payments are how you stay current with the IRS. Payments are due April 15, June 15, September 15, and January 15. Failure to pay estimated taxes on time results in an underpayment penalty. Use IRS Form 1040-ES to calculate your quarterly payments.

What happens if my LLC does not file taxes?

Failure to file carries serious consequences. For partnerships and S-Corps, the late filing penalty is $220 per partner or shareholder per month (for 2024 returns), up to 12 months. For personal returns, the failure-to-file penalty is 5% of the unpaid tax per month, up to 25%. The failure-to-pay penalty is 0.5% per month, also up to 25%. Interest accrues on unpaid taxes from the due date. In severe cases, the IRS may file a substitute return on your behalf, which typically does not include deductions you would have claimed. Beyond IRS penalties, an LLC that neglects its state filing obligations risks administrative dissolution, which Next Step Filings can help resolve through its reinstatement services.

How does an LLC in a no-income-tax state handle federal taxes?

LLCs formed in states without a personal income tax (such as Texas, Florida, Wyoming, Nevada, Washington, South Dakota, and Alaska) still owe federal income tax and self-employment tax. The state you form in does not affect your federal tax obligations. Additionally, even states without income tax may impose other taxes on LLCs, such as franchise taxes (Texas), gross receipts taxes (Washington's B&O tax), or annual filing fees. An LLC formed in a no-tax state that operates in a state with income tax may owe taxes in the state where it does business.

What is the difference between LLC taxes and sole proprietorship taxes?

From a federal tax perspective, a single-member LLC taxed as a disregarded entity is treated the same as a sole proprietorship. Both report income on Schedule C, and both pay self-employment tax at 15.3%. The key difference is not in taxation but in legal protection. An LLC provides a liability shield that separates your personal assets from business debts and lawsuits. A sole proprietorship offers no such protection. For a detailed comparison, see the Next Step Filings guide on LLC vs sole proprietorship.

Next Step Filings is a private business services company and does not provide legal advice.

Written by Lisa Matthews, General Manager and Business Compliance Advisor at Next Step Filings. For help with LLC formation, annual renewals, or reinstatement filings, visit nextstepfilings.com or call 1-888-851-6604.