LLC Tax Benefits Guide
The way you file LLC taxes is one of the most important decisions you’ll make as a business owner. Your tax treatment impacts your business in many ways — both big and small — from day one. Your overall tax burden, self-employment taxes, and ability to grow your business all rest on the tax election you choose when forming your new LLC.
This complete guide breaks down the advantages of the default LLC tax structure. It digs into other options for LLC tax elections with details on how to choose the best fit for your business needs. You will also find resources covering how and when to file, so read more to unlock the power of LLC tax benefits and set your business on a path to success.
Is An LLC Right For My Business?
There are millions of Limited Liability Companies (LLCs) in the United States, with more being created by the minute. Although LLCs are a recent addition to legal entity structures, they are a popular choice for business owners who want to limit their personal liability. Forming an LLC generally protects owners’ personal assets against business lawsuits and debt by creating a legal entity separate from their personal interests. They are considered a disregarded entity by default, offering straightforward taxation.
What are the tax benefits of an LLC?
When it comes to taxation, the main benefits an LLC offers are simplicity and flexibility. By default, LLCs are taxed just like a sole proprietorship or general partnership. This means that LLC owners report income on their personal tax return, and pay the 15.3% self-employment tax. LLCs do not need to pay a corporate tax. This makes tax filing simple, but still allows alternate tax elections like S-Corp and C-Corp treatments for different business scales and structures.
What Is A Default Tax Election?
A default tax election is just the standard way your LLC will be taxed if you don’t apply with the IRS to be taxed differently. This can vary based on how many members your LLC has. Here’s how that breaks down:
Single-member LLC
Single member LLCs are taxed as a sole proprietorship and report profits and losses on Schedule C of the owner’s personal tax return.
Multi-member LLC
Multi-member LLCs taxed as a partnership pass profits through to members to report revenue using Form 1065.
Both options enjoy pass-through taxation, which can help minimize the tax burdens for your LLC.
What is pass-through taxation?
LLCs are taxed as pass-through entities by default, which means that profits “pass through” to their members personal tax returns. The LLC itself does not file a tax return. This is a perk for business owners looking for simplicity, since the LLC doesn’t pay federal income tax itself.
What other taxes do LLCs have to pay?
While the LLC won’t need to pay federal income taxes, members will need to report revenue on their personal returns. Since LLC owners cannot be employees of the LLC under the default tax election, they must pay self-employment taxes on any earnings from the business. The current self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
LLCs may also be responsible for state taxes, which can vary from state to state. Your specific state’s taxes and fees can greatly affect how much you will owe annually. Nevada, South Dakota, and Wyoming are popular states to form in, since they don’t have business taxes. States like California, on the other hand, charge a flat-rate minimum annual franchise tax for LLCs that starts at a steep $800.
Understanding S-Corp and C-Corp Tax Elections
Choosing the right tax election can impact your LLC’s finances, how you pay yourself, and what kind of paperwork you’ll need to manage. Here’s a breakdown of two common options—S-Corporation and C-Corporation status—to help you decide what works best for your business.
S-Corporation (S-Corp) Tax Status
S-Corp is a tax election—not a legal business type—that allows your LLC to be taxed as a pass-through entity, much like a standard LLC. The big difference? LLC owners (called “members”) can also be treated as employees, which opens the door to tax savings.
Key Benefits
- Split income into salary and profit: As an owner-employee, you can take a reasonable salary that’s subject to self-employment taxes. The rest of your business profits can be distributed to members and aren’t hit with those same taxes.
- Tax relief for passive members: Members who aren’t actively involved in the business still report income on personal tax returns, but without paying self-employment tax.
- Investor-friendly: The structure can be attractive to silent partners or outside investors who aren’t part of daily operations.
Potential Drawbacks
- More paperwork & complexity: S-Corps require payroll systems, compliance filings, and typically a CPA to help manage everything.
- Strict eligibility rules: Not every LLC qualifies. If you don’t meet the requirements, your status could be revoked.
- Risk of double taxation if revoked: If S-Corp status is lost, your LLC might default to a C-Corp, which means facing corporate and personal taxes.
How to Elect S-Corp Status
- File IRS Form 2553 – This designates the corporation as an S-Corp for tax purposes.
IRS S-Corp Requirements
- Must be a U.S.-based (domestic) business.
- All members must be U.S. citizens or residents.
- No more than 100 members.
- All members must have equal rights to distributions.
C-Corporation (C-Corp) Tax Status
C-Corp is another tax election available to LLCs. Unlike S-Corps, C-Corps are taxed as separate entities. That means the business files its own tax return and pays corporate income tax, and then members pay personal taxes on distributions—commonly called double taxation.
Key Benefits
- Lower corporate tax rates: Profits are taxed at a flat federal corporate rate (currently 21%), which may be lower than individual tax rates for high earners.
- Unlimited shareholders: Unlike S-Corps, there’s no cap on the number of members or restrictions on their citizenship.
- Retained earnings: You can leave some profits in the business to reinvest, pay down debt, or build reserves—rather than distribute everything right away.
Potential Drawbacks
- Double taxation: Profits are taxed once at the corporate level and again when distributed to members as dividends.
- More formalities and paperwork: You’ll need to keep up with requirements like holding shareholder meetings and maintaining corporate records—especially important for investor confidence.
How to Elect C-Corp Status
- File IRS Form 8832 – This changes your LLC’s classification to a corporation.
- Then file taxes using IRS Form 1120 – The U.S. Corporation Income Tax Return.
IRS C-Corp Requirements
- No special requirements. Any LLC can elect C-Corp tax status by filing the right forms.
How Do I Choose A Tax Election?
Businesses are like fingerprints—no two are exactly alike. Your LLC has its own goals, challenges, and financial situation, which means the right tax setup for one business might not be the best fit for yours. As you plan for the future, it’s important to think about where your business is now, where it’s headed, and what kind of support you’ll need along the way. To help you get started, here are a few key things to consider:
Your tax election for your LLC depends on your revenue and growth plans.
Just starting out? The default tax status can offer flexibility.
Seeing strong growth and higher revenue? It might be time to explore other options.
Scaling fast with big profits?
If you’re growing fast, making serious money, and want to reinvest while staying open to investors, C-Corp status could be smart—even with double taxation. It lets you keep funds in the business for hiring, assets, and expansion.
Some tax elections are simple—profits just go on your personal return.
Others involve more paperwork: qualification forms, distribution tracking, federal filings, even notes from shareholder meetings.
If you don’t have dedicated tax help, that can be a lot. Take stock of your needs and resources before choosing.
Side hustle with modest sales?
Selling your fandom jewelry online and at conventions but mostly breaking even? Keeping the default tax status means fewer forms and simpler filing—as a sole proprietor—leaving more time for designing and binge-watching your favorite shows.
Not a tax pro? That’s okay—but you’ll likely need a CPA to stay compliant.
If you’re growing and have (or plan to hire) employees, self-employment taxes can add up fast.
Reviewing your finances can help you estimate what you’ll owe—and whether a different tax status could save you money.
Rapid restaurant growth?
Business is booming, and you’re hiring fast. A CPA sees your profits climbing and recommends S-Corp status. It could cut self-employment taxes by splitting income between salary and distributions—setting you up for smoother growth ahead.
What Tax Forms Do I Use to File My Return?
The form you’ll use to file your LLC’s taxes depends on your tax election. Here’s a quick breakdown by type:
Default Tax Status (No Election Made)
- Single-member LLC (Sole Proprietor) Form 1040, U.S. Individual Income Tax Return
- Multi-member LLC (Partnership) Form 1065, U.S. Return of Partnership Income
S-Corporation (S-Corp) Election
- LLC taxed as an S-Corp Form 1120-S, U.S. Income Tax Return for an S Corporation
C-Corp Tax Forms:
- LLC taxed as a C-Corp Form 1120, U.S. Corporation Income Tax Return
Need help figuring out which form applies to your situation? A tax professional can guide you based on your election type and business structure.
Now you know all the basics of LLC taxes. Ready to take the first step today?
Frequently Asked Questions
When do I choose my tax election?
To choose your tax election, you will need to file Form 8832: Entity Classification Election within 75 days of forming your LLC. If you don’t file in time, you may still be able to make a late tax election. This usually involves providing a specific reason for the late election.
Can I change my tax election?
An LLC can generally change its tax election for the following tax year using Form 8832. Once this is filed, the LLC cannot make another change to the tax election for 60 months after the effective election date.
Can an LLC owner be an employee of the business?
Yes, an LLC owner can be an employee if they elect S-Corp tax status. Otherwise, LLC owners are not considered employees.
What are payroll taxes, and are they required for an LLC?
Self-employment or payroll taxes generally include Social Security, Unemployment, and Medicare taxes. All LLC income is subject to these taxes by default. Owners can lower the amount of LLC income subject to these taxes if they are taxed as an S-Corp.
How are Series LLCs taxed?
Series LLCs are taxed just like a regular LLC, with the owner reporting all income from the main LLC on Schedule E of their personal tax return. Since Series LLCs are available only in certain states, those states may also have specific tax requirements which vary by jurisdiction.
What happens if an LLC doesn’t file taxes correctly?
If you don’t file your LLC taxes or fail to pay the correct amount, the IRS may accrue monthly interest on the amount due or notify you of additional outstanding balances with the possibility of legal action like a tax lien or levy. For this reason, it is best to file promptly and seek the help of a qualified professional if you’re unsure how to file.