LLC Taxes USA: How LLCs Are Taxed

By default: • Single-member LLC: taxed as sole proprietorship (Schedule C) • Multi-member LLC: taxed as partnership (Form 1065, K-1s)

In both cases, income 'passes through' to members' personal returns. The LLC itself doesn't pay income tax.

All members pay self-employment tax on their share of profits.

An LLC can elect S-Corp tax treatment (Form 2553): • Pay yourself a 'reasonable salary' → subject to payroll taxes • Take remaining profits as distributions → NOT subject to SE tax • Saves 15.3% SE tax on the distribution portion

Example: $150K profit. Pay $80K salary, take $70K distribution. SE tax saved: $70,000 × 15.3% ≈ $10,710

Caveat: increased complexity, payroll requirements, reasonable salary scrutiny.

LLCs can also elect C-Corp taxation (rare for small businesses): • Corporation pays 21% flat federal tax • Distributions taxed again as dividends (double taxation) • May benefit from corporate deductions not available to individuals • Makes sense mainly for businesses retaining significant earnings