LLCs don't pay federal income tax themselves — you do, through your personal return
An LLC (limited liability company) is a legal structure that protects your personal assets, but it is not a tax category. The IRS does not have a "LLC tax rate" or an "LLC tax form." Instead, the IRS looks through the LLC to the people who own it and taxes them based on how many owners there are.
If you are the only owner, you report the LLC's income and expenses on your personal tax return using Schedule C (the self-employment form). If there are two or more owners, the LLC files a partnership return on Form 1065, and each owner reports their share on Schedule E. You can also elect to have your LLC taxed as an S corporation or C corporation if that saves you money, but that is a separate choice you make with the IRS.
The key point: you always owe federal income tax on LLC profits. The LLC structure itself does not reduce or eliminate that tax. It only separates your business debts from your personal assets.
Key Takeaways
- Single-owner LLCs report business income on Schedule C of the owner's personal return; multi-owner LLCs file Form 1065 and each owner reports their share on Schedule E.
- You owe federal income tax on all LLC profits, whether or not you withdraw money from the business.
- LLCs can elect to be taxed as an S corporation or C corporation, which may lower your total tax bill if your business is profitable enough.
- Self-employment tax (Social Security and Medicare) applies to LLC income unless you make an S corporation election.
- You must file a federal tax return for the LLC itself if it has more than one owner, even if the business made no profit.
Single-Owner LLCs: Schedule C and self-employment tax
If you own an LLC by yourself, the IRS treats it as a sole proprietorship for tax purposes. You do not file a separate business tax return. Instead, you report all income and expenses on Schedule C (Profit or Loss from Business), which attaches to your Form 1040.
You owe federal income tax on the net profit (income minus deductible expenses) at your personal tax rate, which depends on your total income and filing status. You also owe self-employment tax on that profit, which covers Social Security and Medicare. Self-employment tax is roughly 15.3% of your net profit after a small deduction.
You must file Schedule C even if your LLC lost money that year. You also must file it even if you did not withdraw any cash from the business — the tax is based on profit, not on what you actually took home.
Multi-Owner LLCs: Form 1065 and Schedule E
If your LLC has two or more owners, the IRS requires the LLC to file Form 1065 (U.S. Return of Partnership Income) every year, regardless of profit or loss. This form is not a tax bill — it is a report that shows how much income the LLC earned and how much each owner's share was.
Each owner then receives a Schedule K-1, which shows their individual share of income, deductions, and credits. You attach this to your personal return and report your share on Schedule E (Supplemental Income and Loss). You owe federal income tax on your share of the profit at your personal rate, plus self-employment tax on your share of the business income.
Form 1065 is due by the 15th day of the third month after the LLC's tax year ends. For a calendar-year LLC, that is March 15. You can request an extension, but the LLC must still file even if it has no profit.
When to elect S corporation or C corporation taxation
By default, a multi-owner LLC is taxed as a partnership, and a single-owner LLC is taxed as a sole proprietorship. You can change this by filing Form 8832 (Entity Classification Election) with the IRS and asking to be taxed as a corporation instead.
An S corporation election can save you money if your LLC is profitable. As an S corp, you split your income into two parts: a reasonable salary (which you pay self-employment tax on) and a distribution (which you do not). If your profit is high enough, the distribution portion can be large, and you avoid self-employment tax on it. This works only if the salary you pay yourself is genuinely reasonable for the work you do.
A C corporation election is less common for small LLCs. The LLC would pay corporate income tax on its profit, and you would pay personal income tax again on any dividends you withdraw. This creates "double taxation" and usually costs more unless you plan to reinvest all profit in the business.
An S or C election requires you to file additional forms each year and keep more detailed records. It makes sense only if your accountant has run the numbers and shown you will save more in self-employment tax than you spend on extra compliance.
What documents you need to file your LLC taxes
Gather these before you sit down to file or meet with a tax preparer:
- Profit and loss statement — a record of all income and all business expenses for the year. Many accounting software programs (QuickBooks, FreshBooks, Wave) generate this automatically.
- Bank and credit card statements — to verify income deposits and business expenses.
- Receipts and invoices — for any expense over $75, and for all vehicle, home office, and equipment expenses.
- 1099 forms — if you paid contractors or vendors more than $600 during the year, you must issue 1099-NEC forms to them and file copies with the IRS.
- Quarterly estimated tax payments — records of any payments you made to the IRS during the year (Form 1040-ES).
- Schedule K-1 from other businesses — if you are a partner or member in another LLC or partnership, you will receive a K-1 that must be reported on your return.
- Prior year tax return — your accountant will need this to compare and spot any unusual changes.
Common mistakes that delay your return or trigger an audit
The most frequent error is mixing personal and business expenses. The IRS flags returns where a business claims personal groceries, car payments, or home rent as deductions. Keep a separate business bank account and credit card so the line between personal and business is clear.
Another common mistake is underreporting income. If you receive 1099 forms from clients, the IRS receives copies too. If your return does not match, you will receive a notice. Report all income, even if you did not receive a 1099.
Home office deductions are audited more often than other deductions, but they are legal. The mistake is claiming too much square footage or too high a percentage of your home. Use the actual percentage of your home that is dedicated to business only, and keep photos and a floor plan.
Vehicle expenses are also common audit targets. You must keep a mileage log showing the date, destination, business purpose, and miles driven for each trip. "Commuting" to your office does not count. Only trips for business purposes (client meetings, supply runs, deliveries) count.
Estimated tax payments and important date
If you expect to owe $1,000 or more in federal income tax and self-employment tax for the year, you must make quarterly estimated tax payments to the IRS. These are due on April 15, June 15, September 15, and January 15 of the following year.
You calculate estimated tax using Form 1040-ES, which asks you to project your income and deductions for the year and divide the tax into four equal payments. If your income varies by season, you can pay more in high-income quarters and less in slow quarters.
Underpayment penalties explore if you pay too little. The penalty is small (currently around 8% annually) but compounds each quarter, so it is worth getting close. If you overpay, the IRS refunds the excess when you file your return.
If you are unsure of your income for the year, a safe approach is to pay 90% of your current year's tax or 100% of your prior year's tax (110% if your prior year income was over $150,000), whichever is smaller. This avoids penalties even if your actual tax is higher.
Frequently Asked Questions
Do I owe federal income tax on money I reinvest in my LLC?
Yes. Tax is based on profit, not on cash you withdraw. If your LLC earned $50,000 and you spent $40,000 on equipment and supplies, you owe tax on the $10,000 profit, even if you left all the money in the business account. The reinvestment does not reduce your taxable income.
What if my LLC had a loss this year?
You can deduct the loss against other income on your personal return, which may reduce your overall tax bill or create a refund. However, if you have losses for three or more years out of five, the IRS may reclassify your LLC as a hobby, and you would no longer be able to deduct losses. Keep records showing you are running a legitimate business, not a hobby.
Do I need to file a separate LLC tax return with my state?
Most states do not require a separate LLC income tax return. You report your LLC income on your state income tax return the same way you report it federally. However, some states (California, New York, Illinois) charge an annual LLC filing fee or franchise tax regardless of profit. Check your state's tax website to confirm.
Can I deduct my LLC formation and legal fees?
Formation fees (filing articles of organization, registered agent fees) must be capitalized and deducted over 15 years using Section 179 amortization. Legal fees for ongoing business matters (contracts, disputes) are deductible in the year you pay them. Keep invoices separate so you know which fees fall into which category.
What happens if I do not file a Schedule C or Form 1065?
The IRS will assess a penalty for failing to file, usually $205 per month (adjusted annually) up to a maximum. If you owe tax and do not file, the IRS can also assess failure-to-pay penalties and interest. If you cannot file by the important date, request an extension using Form 4868 (for your personal return) or Form 7004 (for Form 1065).