How an LLC Is Taxed: Defaults and Elections

How does the IRS tax an LLC by default?

A domestic LLC with one owner is normally disregarded for federal income tax; one with multiple owners is normally a partnership. An LLC is a state-law business entity, while its federal tax classification follows its ownership and any valid election (IRS: LLC; eCFR: classification defaults).

The table describes federal income tax, not all taxes or every filing. See which returns your business files for the return that matches your classification. Corporate classification survives a change in member count, but an S election ends if a new owner makes the LLC ineligible. Check both the election and current owners before relying on S status (eCFR: member changes; IRS: S election termination).

What does "disregarded entity" mean for a single-member LLC?

A disregarded single-member LLC is ignored as a separate taxpayer for federal income tax, so its income and expenses appear on the owner's return. If the owner is an individual, the schedule depends on the activity: a trade or business commonly uses Schedule C, while rental and farm activities may use different schedules. If a corporation or partnership owns the LLC, the owner reports its activity within that owner's return (IRS: single-member LLCs).

The LLC remains a legal entity under state law. It is also treated separately for federal employment tax and certain excise taxes: an LLC with employees uses its own name and employer identification number for employment tax reporting. A disregarded LLC may therefore need its own tax number even though the owner supplies the owner's number for federal income-tax information reporting (IRS: single-member LLCs).

How is a multi-member LLC taxed?

A domestic LLC with multiple owners is generally a partnership for federal income tax unless a corporate election applies. The LLC reports partnership activity, and each member reports the share allocated to them; a cash draw is a separate event from that allocation (IRS: LLC filing as a partnership; IRS: Publication 541).

If a disregarded LLC gains another member, its default classification changes to partnership. If a partnership-classified LLC becomes single-member, its default classification changes to disregarded. The way the interest was bought, sold, or contributed can itself create tax consequences, so member changes need more than an updated member count (IRS: Publication 3402). For the partnership return and allocations, see how partnerships are taxed. If the owners are spouses, see spouse and family LLCs before assuming the usual multi-member result.

Do LLC owners pay tax on profit left in the business?

Yes. An owner of a disregarded LLC, partnership-classified LLC, or S corporation generally reports taxable business income or their allocated share even when the cash stays in the LLC. Withdrawing cash generally does not decide whether that income is reported (IRS: Publication 3402; IRS: Publication 541; IRS: Form 2553 instructions).

A C corporation is different: the LLC itself pays tax on corporate taxable income. An owner is generally taxed when the corporation pays a taxable dividend or wages, rather than on the corporation's retained profit merely because they own it. Distributions can have different tax treatment depending on the corporation's earnings and the owner's basis (IRS: Publication 542). For the mechanics of draws, wages, and distributions, see paying yourself.

Do LLC owners pay self-employment tax?

An individual who operates a trade or business through a disregarded single-member LLC generally has self-employment earnings. An individual member of a partnership-classified LLC may also owe self-employment tax on their share of ordinary business income and on payments for services. An LLC label alone does not remove that tax (IRS: single-member LLCs; IRS: partners and self-employment tax).

The partnership result depends on the member's role and the income's character. A member who qualifies as a limited partner for this tax generally excludes their distributive share but includes payments for services. Whether an LLC member qualifies requires a facts-based review; limited liability under state law does not by itself settle the federal self-employment question (IRS: partners and self-employment tax).

An S corporation owner's pass-through profit is generally outside self-employment tax, but payments for the owner's work may be wages subject to employment taxes. The IRS can reclassify non-wage distributions as wages when a shareholder-employee is not reasonably compensated (IRS: S corporation compensation).

For a C corporation-classified LLC, corporate profit or a dividend does not itself create self-employment earnings for an owner. Pay for an owner's work as a corporate employee is generally wages subject to employment taxes (IRS: paying yourself).

Can an LLC choose C corporation or S corporation taxation?

Yes. An eligible domestic LLC can elect corporate taxation without converting the LLC into a corporation under state law. Form 8832 elects C corporation treatment; a timely Form 2553 can elect S corporation treatment and also make the underlying corporate classification election, so a separate Form 8832 is generally unnecessary for that S election (IRS: Publication 3402; IRS: Form 2553 instructions).

S status has eligibility limits, including permitted owners, no nonresident alien shareholders, a single class of stock, and owner consent. An LLC operating agreement that gives members different rights to distributions can affect eligibility (IRS: Form 2553 instructions). For whether the election suits the business, see should you elect S corporation status; for a structural comparison, see LLC or C corporation.

How do I make or change an election, and how far back can it reach?

The step depends on the LLC's current classification and the treatment it wants next. A Form 8832 election can generally take effect up to 75 days before filing or up to 12 months after filing; a Form 2553 S election is generally due within two months and 15 days after the tax year begins, or during the preceding tax year (eCFR: election timing; IRS: Form 2553 instructions).

Form 8832 needs the signatures of all current members or an authorized officer, manager, or member; a retroactive election can also require former owners' signatures. Attach a copy to the LLC's federal return for the election year, or to an owner's return if the LLC has no such return (eCFR: election filing rules). Form 2553 needs an authorized officer's signature and the consent signatures of all required owners, including former owners who held interests between its effective date and filing date (IRS: Form 2553 and instructions).

Revoking S status generally leaves the LLC taxed as a C corporation; it does not restore its former default. Returning to partnership or disregarded treatment generally requires a valid Form 8832 election and can trigger a deemed liquidation (IRS: revoking an S election; eCFR: deemed S election and classification changes). Electing S status again before the fifth tax year after the revocation generally needs IRS consent (IRS: Form 2553 instructions). The 60-month limit has exceptions, including an election effective on a newly formed LLC's formation date. Late-election relief may be available, but a missed filing date does not make a requested past effective date automatic (eCFR: election limits; IRS: Form 2553 instructions). If Form 2553 was late or its acceptance never arrived, see late S corporation election relief.

An election can also create a deemed transfer for federal tax even when no asset moves under state law. Switching from corporate taxation to partnership or disregarded treatment is treated as a corporate liquidation; the tax on that transaction depends on the LLC's assets, debt, basis, and owners. Switching into corporate taxation also has deemed asset-transfer rules (eCFR: elective changes). Gather the formation and operating documents, member history, prior returns, asset and debt records, and IRS election notices before changing classification. A state-law conversion is a separate question covered by changing your business structure.

Which classification goes on an LLC's Form W-9?

For a US payee, Form W-9 follows the LLC's federal tax classification, not the letters “LLC” in its legal name. A disregarded LLC checks the box for its owner's classification and gives the owner's name and taxpayer identification number; if that owner is also disregarded, use the first owner that is not disregarded. An LLC taxed as a partnership or corporation checks the LLC box and enters its code (IRS: Form W-9; IRS: single-member LLCs).

If a partnership-classified LLC has direct or indirect foreign partners and gives Form W-9 to a partnership, trust, or estate in which it owns an interest, it must also check line 3b (IRS: Form W-9).

If the disregarded LLC's owner is a foreign person for US tax purposes, the owner gives the appropriate Form W-8 instead of Form W-9, even with a US tax number. A noncitizen who is a US resident alien is a US person for this purpose and generally uses Form W-9 (IRS: Form W-9). See foreign-owned single-member LLC filing for the separate US filing issue.

Do states tax LLCs the same way the IRS does?

Federal classification does not settle state tax. California generally uses the LLC's federal classification, yet a disregarded or partnership-classified LLC can owe California's annual LLC tax and a fee based on total income derived from or attributable to California; a corporation-classified LLC uses California's corporation tax filing path (California FTB: LLC filing information; California FTB: LLC taxed as a corporation).

Texas has a separate franchise tax system for taxable entities formed there or doing business there, with thresholds and reporting rules set by report year (Texas Comptroller: franchise tax). Check the states where the LLC is organized, registered, or doing business; federal pass-through treatment alone does not answer the state question. For California amounts and exceptions, see California minimum tax and LLC fee.

Example

Illustrative amounts in US dollars; no tax calculation is implied. Two unrelated people own a domestic LLC taxed as a partnership. The LLC has $200,000 in revenue and $100,000 in deductible expenses, leaving $100,000 in profit. Its agreement allocates the profit equally. Each member takes out $20,000, and the LLC keeps $60,000 for operations.

Each member generally reports a $50,000 share of profit, even though each received only $20,000 in cash. The $20,000 draw does not replace the income allocation, and it is not automatically a second taxable payment. A member's self-employment tax result depends on their role and the kind of income. If the LLC instead had a valid C corporation election, the corporation would report its own taxable income and the owners would not report half of its retained profit simply because they owned it (IRS: Publication 541; IRS: Publication 542).

Different for you?

The LLC's ownership, election history, and location can change the answer. Match the next step to the fact that differs:

• You need the actual return forms: use which returns your business files.
• Your LLC has several owners, or you own it with your spouse: see how partnerships are taxed or spouse and family LLCs.
• You are weighing S or C corporation treatment: see S corporation status or LLC or C corporation.
• You are changing an election with assets, debt, or losses in the LLC: the deemed transfers can create tax even without a state-law conversion. Bring the operating agreement, member list, election letters, past returns, and asset and debt records to tax preparation.
• Your S election was late or never confirmed: see late S corporation election relief.
• A foreign person owns the LLC, or you live in Canada: see foreign-owned single-member LLC filing or Canadian owner of a US LLC.
• Your LLC operates in California or holds rental property: see California minimum tax and LLC fee or rental property in an LLC.