LLC Taxes Explained: How LLCs Are Taxed in Every State

The Myth: "LLCs Don't Pay Taxes"

The confusion stems from a real fact: the LLC is a state-law legal structure, not a federal tax classification. The IRS does not recognize "LLC" as a distinct tax category. Instead, it looks at how many members the LLC has and what elections the owner has made, then taxes it as one of four existing structures. The result is that an LLC absolutely pays taxes — the question is through which mechanism.

According to IRS data, pass-through entities including LLCs now account for more than 50% of total U.S. business net income, up from roughly 22% in 1980 (per the Tax Foundation's analysis of IRS Statistics of Income data). The LLC specifically has become the dominant structure: approximately 21.6 million active LLCs exist in the United States, representing 34.1% of all pass-through business income as of the most recent IRS filing data. These entities all pay tax — just not at the entity level for most classifications.

The Four Ways an LLC Can Be Taxed

1. Disregarded Entity (Single-Member LLC Default)

If you form a single-member LLC and do nothing else, the IRS treats it as a "disregarded entity." The LLC has no separate tax existence — it is invisible to the IRS. All income and expenses flow directly to the owner's personal Form 1040 via Schedule C (for business income), Schedule E (for rental income), or Schedule F (for farming income).

This is both the simplest and often the most expensive tax structure. Because the net income reports on Schedule C, it is treated as self-employment income subject to the full 15.3% self-employment tax — 12.4% Social Security on the first $176,100 of net earnings in 2026, and 2.9% Medicare on all net earnings. An LLC member earning $120,000 in net business income owes approximately $16,955 in SE tax alone, before any income tax.

The disregarded entity status does provide one valuable benefit: simplicity. No separate business return is required, state compliance is minimal, and the QBI deduction (up to 20% of net business income) is fully available. Use our Self-Employment Tax Calculator to model exactly what a single-member LLC would owe at your income level.

2. Partnership (Multi-Member LLC Default)

A multi-member LLC — any LLC with two or more members — is taxed as a partnership by default. The LLC files Form 1065 (U.S. Return of Partnership Income) by March 16, 2026. The LLC itself pays no federal income tax. Instead, each member receives a Schedule K-1 (Partner's Share of Income, Deductions, Credits, etc.) reporting their share of income, losses, deductions, and credits, which they then report on their personal Form 1040.

General partners (active participants) in a multi-member LLC are subject to self-employment tax on their distributive share of ordinary business income. Limited partners who are genuinely passive receive an exception — their passive income is not subject to SE tax. This distinction matters enormously for LLC operating agreements: the terms you set determine how income is characterized.

Guaranteed payments made to LLC members for services — similar to salaries — are always subject to SE tax regardless of partner status, and are reported separately on Schedule K-1, Box 4.

3. S-Corporation (Elected Status via Form 2553)

This is the most strategically significant election available to LLC owners. By filing Form 2553 with the IRS, an LLC elects to be taxed as an S-corporation. The LLC still passes income through to members — no entity-level federal tax — but the mechanism for doing so creates a powerful SE tax savings opportunity.

Under S-corp taxation, owner-members who work in the business must be paid a "reasonable salary" through payroll. That salary is subject to payroll taxes (Social Security and Medicare at 15.3%, split evenly between employer and employee). However, profits above the salary are distributed as S-corp distributions, which are not subject to self-employment tax.

The IRS requires the salary to be "reasonable" — meaning comparable to what you would pay an unrelated employee performing the same work in the same market. Setting the salary too low is the #1 S-corp audit trigger. Most tax professionals recommend 40–60% of net business income as a starting point, with adjustment based on your industry and role. S-corp election generally makes financial sense when net annual income from the business consistently exceeds $50,000.

The S-corp files Form 1120-S annually (also due March 16, 2026) and issues Schedule K-1 to each shareholder reporting their share of income, deductions, and credits. The LLC must also run actual payroll and file Form 941 quarterly.

4. C-Corporation (Elected Status via Form 8832)

An LLC can elect C-corporation status by filing Form 8832 (Entity Classification Election). The C-corp pays a flat 21% federal corporate income tax on its profits — a rate made permanent by the Tax Cuts and Jobs Act and unchanged in 2026. Unlike pass-through structures, the LLC's profits are not reported on the owners' personal returns until dividends are paid, at which point shareholders pay qualified dividend tax (0%, 15%, or 20% depending on income).

C-corp election is rarely optimal for small businesses because of this "double taxation" — the corporation pays tax on profits, and shareholders pay again when dividends are distributed. However, it can make sense for businesses retaining large amounts of income for reinvestment, businesses planning to raise venture capital (VCs typically require C-corp structure), or businesses with significant employee benefit programs since C-corps can deduct more generous benefits.

The C-corp files Form 1120 by April 15, 2026, with a 6-month extension available via Form 7004.

LLC Tax Classification Comparison Table

The QBI Deduction: 20% Off the Top for Pass-Through LLCs

One of the most valuable provisions for LLC owners is the Section 199A Qualified Business Income (QBI) deduction. Originally enacted under the TCJA and set to expire at the end of 2025, the QBI deduction was made permanent by the One Big Beautiful Bill Act signed in July 2025. This means LLC owners can now plan around it indefinitely.

The deduction allows eligible pass-through business owners — including single-member and multi-member LLC owners, and LLC members in S-corp-elected entities — to deduct up to 20% of their qualified business income from taxable income. For a sole proprietor LLC member with $100,000 in net business income, the QBI deduction alone eliminates $20,000 from taxable income.

The 2026 income thresholds are $201,775 for single filers and $403,500 for married filing jointly (per IRS Rev. Proc. 2025-32). Below these thresholds, the deduction is straightforward and fully available. Above them, additional rules apply based on W-2 wages paid and the nature of the business.

Specified Service Trade or Business (SSTB) owners — attorneys, accountants, physicians, financial advisors, consultants — face a stricter phase-out that eliminates the deduction entirely for single filers above $276,775 and married filers above $553,500. If you are an SSTB owner near these thresholds, strategies like contributing to a Solo 401(k) or SEP IRA can reduce your taxable income below the phase-out range and preserve the deduction. See our Self-Employment Tax Guide for deduction strategies that interact with the QBI calculation.

State-by-State LLC Tax Differences

Federal tax treatment is only half the story. States have their own rules for LLCs, and the differences between states are dramatic enough that the state of formation (and more importantly, the state where you actually do business) has a significant impact on your annual tax bill.

A critical and widely misunderstood point: forming your LLC in Wyoming or Delaware does not exempt you from taxes in your home state. If you live in California and operate your business there, California will tax you regardless of where the LLC is registered. You would need to register as a foreign LLC in California, pay California's $800 annual minimum franchise tax, and file a California return. The only way to genuinely benefit from a no-tax state is to actually live and operate there.

High-Tax States with Notable LLC Costs

California imposes an $800 minimum annual franchise tax on every LLC, regardless of profit. If your LLC earns more than $250,000 in California gross receipts, an additional gross receipts fee applies: $900 for receipts between $250,000 and $499,999, scaling up to $11,790 for LLCs with over $5 million in California gross receipts. California also has some of the highest personal income tax rates in the country (up to 13.3%), which pass-through LLC income is subject to.

New York imposes a Publication and Filing Fee and an annual filing fee based on gross income. Multi-member LLCs pay an annual fee ranging from $25 (under $100,000 gross income) to $4,500 (over $25 million). New York City additionally imposes an Unincorporated Business Tax (UBT) of 4% on net income from business activities within New York City — a significant additional cost for NYC-based LLC members.

Texas imposes a franchise tax (the "margin tax") on most LLCs doing business in the state. The rate is 0.375% of total revenue for most industries (0.75% for most others), with an exemption for businesses with less than $2.47 million in total revenue. Despite having no personal income tax, Texas LLC owners still face this entity-level assessment.

States with No Personal Income Tax: Best for LLC Pass-Through Income

Nine states impose no personal income tax, making them particularly favorable for LLC members whose business profits flow through to personal returns: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Of these, Wyoming and South Dakota are frequently cited as the most LLC-friendly overall, with minimal annual fees, strong privacy protections, and no corporate or personal income tax.

Pass-Through Entity Tax (PTE Tax) Elections

Since the TCJA capped the individual deduction for state and local taxes (SALT) at $10,000 — recently increased to approximately $40,400 for 2026 under the One Big Beautiful Bill Act — many states created Pass-Through Entity (PTE) tax elections as a workaround. Under a PTE election, the LLC pays state income tax at the entity level, and owners receive a credit on their personal returns. Because the entity-level payment is a business expense, it is deductible on the federal return without the SALT cap applying.

Most high-tax states now have PTE elections, including California, New York, New Jersey, Massachusetts, and Illinois. The benefit is largest for owners in high tax brackets with substantial pass-through income. If your LLC operates in a state with a PTE election and your state tax bill exceeds $40,400, speak with a CPA about whether the election makes sense. See how state income taxes affect your overall liability with our State Income Tax Rates guide.

LLC Filing Forms and Deadlines Summary

When to Switch LLC Tax Classification

Tax classification is not permanent — you can change it, but timing matters. Form 2553 (S-corp election) must generally be filed by March 15 of the tax year for which you want the election to take effect, or within 75 days of forming the LLC if you want it to apply from day one. Late elections are possible with IRS relief procedures if you have "reasonable cause" for missing the deadline, and the IRS has historically been fairly permissive about granting late elections.

The S-corp election makes sense to revisit annually as income grows. If you were making $45,000 per year and didn't bother, but now consistently earn $100,000+, a fresh analysis with your CPA is warranted. The payroll setup cost and additional accounting fees for an S-corp run $1,500–$4,000 per year — the SE tax savings need to meaningfully exceed that for the election to be worth it. See our Small Business Tax Deductions guide for strategies that work within any LLC structure.

Frequently Asked Questions

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