How Is an LLC Taxed? 2026 Guide to All Four Tax Classifications

The LLC is a legal structure, not a tax category. The IRS doesn't recognize "LLC" as a tax classification — it taxes your LLC based on member count and any elections you've made. The same LLC can be taxed in four very different ways, with wildly different self-employment tax bills. Here's exactly how each works, what forms you file, and how the numbers compare at your income level.

Default treatment: what happens if you make no election

Single-member LLC → disregarded entity (Schedule C)

A single-member LLC with no tax election is treated as a "disregarded entity" — the IRS acts as if the LLC doesn't exist separately from you for federal income tax. You report all business income and expenses on Schedule C of your personal Form 1040, and every dollar of net profit is subject to self-employment tax.¹

Self-employment tax in 2026 works as follows: the IRS applies the tax to 92.35% of net profit (the "net earnings" base, which deducts the employer half of FICA), then charges 12.4% Social Security (on the first $184,500) and 2.9% Medicare (on all earnings). At $150,000 net profit, that's approximately $21,194 in SE tax before considering the 50% SE deduction or retirement contributions.

The disregarded entity is the right choice for most owners under $80,000 in net profit. The simplicity — no payroll, no corporate return, no state entity taxes — typically outweighs the FICA overhead at lower income levels. Above $100,000, the math starts to shift toward the S-corp election.

Multi-member LLC → partnership (Form 1065)

Add a second member and the LLC becomes a partnership by default, without any election required. The LLC files Form 1065 (due March 15) and issues a Schedule K-1 to each member showing their share of partnership income. Each active member then pays self-employment tax on their ordinary income from the K-1 — even if that profit stayed in the business and wasn't actually distributed as cash.²

Adding a partner doesn't reduce SE tax: both active members pay the full rate on their distributive shares. If two co-founders split $300,000 of profit 50/50, each pays SE tax on $150,000 as if they were solo. See Multi-Member LLC Taxes for the full K-1 breakdown and the one-participant 401(k) exception for owner-only partnerships.

Elective treatment: S-corporation

An LLC of any membership type can elect to be taxed as an S-corporation by filing Form 2553 with the IRS. The election must be filed by March 15 of the current tax year (for calendar-year S-corps), or within 75 days of entity formation for new businesses. Late elections are available under Rev. Proc. 2013-30.³

How S-corp taxation works

Under S-corp treatment, the LLC files Form 1120-S (due March 15) and issues a Schedule K-1 to each shareholder. Active owner-employees must receive a "reasonable" W-2 salary for services rendered. Profit above the salary is paid as distributions — and here's where the tax savings appear:

• W-2 salary: subject to FICA (employer + employee sides = 15.3% on first $184,500, 2.9% above)
• Distributions: not subject to FICA. You pay income tax and the 23% QBI deduction applies, but no Social Security or Medicare.⁴

At $200,000 net profit with a $90,000 W-2 salary, roughly $110,000 of distributions avoid FICA entirely. The FICA savings on those distributions exceed $16,800 — minus $3,000–$5,500 in annual S-corp overhead (payroll processing, incremental CPA fees, state filing costs).

The IRS requires the salary to reflect "reasonable compensation" for the work performed — it cannot be artificially depressed just to minimize FICA. The S-Corp Reasonable Salary Calculator models defensible ranges by role and industry based on IRS guidance and court rulings.

Elective treatment: C-corporation

An LLC can elect C-corporation tax treatment by filing Form 8832 (the "check-the-box" election). Under C-corp treatment, the entity pays a flat 21% corporate income tax on profits. Dividends distributed to members are then taxed again at the individual level — at 0%, 15%, or 20% depending on total income, plus the 3.8% Net Investment Income Tax above $200,000 (single) / $250,000 (MFJ).⁵

For most self-employed service-business owners, double taxation makes the C-corp unattractive — profits are taxed twice before reaching your pocket. The primary exception: qualifying for QSBS §1202 (up to $15 million of capital gains excluded from federal tax under the One Big Beautiful Bill Act), which requires holding stock in a C-corp. Product companies and tech startups that expect a large exit sometimes structure as C-corps from day one for this reason. See QSBS Section 1202 Guide. For consulting, advisory, and service businesses, the C-corp almost always loses to the S-corp on after-tax math.

2026 LLC tax structure comparison

*Solo 401(k) requires no non-spouse W-2 employees. Hiring one triggers SECURE 2.0 long-term part-time employee rules that can affect eligibility. See 1099 vs. W-2 Employee.

Sole Proprietor vs. S-Corp Tax Calculator 2026

Enter your LLC's net profit and the W-2 salary you'd pay yourself as an S-corp. The calculator estimates total federal tax under each structure and shows whether the S-corp election pays off after overhead.

When to reconsider your LLC tax classification

Consider electing S-corp when:

• Net profit consistently exceeds $80,000–$100,000 and income is relatively stable year to year
• You're the sole owner, or owner + spouse — hiring non-spouse W-2 employees complicates solo 401(k) eligibility and increases payroll overhead
• Income is high enough to benefit from the QBI W-2 wage limitation: above $201,775 (single) / $403,500 (MFJ), the 23% QBI deduction is limited to 50% of W-2 wages paid. S-corp owners can set salary to optimize this ceiling. See QBI Deduction Optimizer

Stick with disregarded entity / sole proprietor when:

• Net profit is below $60,000–$80,000 — S-corp overhead (payroll, incremental CPA, state filing fees) typically exceeds FICA savings
• Income is highly variable — S-corp compliance costs apply every year regardless of whether you had a profitable year
• You're planning to hire non-spouse employees soon — the solo 401(k) implications are significant and the FICA savings may not survive the added payroll costs

S-corp additional considerations

Electing S-corp is not permanent — it can be revoked — but revocation has a 5-year restriction on re-electing. If you're unsure, model the math first. The LLC vs. S-Corp detailed guide walks through the California franchise tax impact, Form 2553 timing, and the QBI wage-limitation interaction at high income levels.

Sources

1. IRS — Single Member LLCs. Disregarded entity default; Schedule C; self-employment tax applicability. SS wage base: SSA — 2026 Contribution and Benefit Base ($184,500). SE tax rates: IRS Topic 554 — Self-Employment Tax.
2. IRS — Partnerships. Multi-member LLC default partnership classification; Form 1065 filing requirement; SE tax on active partners' distributive share of ordinary income.
3. IRS — S Corporations. Form 2553 election; March 15 deadline for calendar-year entities; 75-day window for new entities; late election availability under Rev. Proc. 2013-30.
4. IRS — S Corporation Compensation and Medical Insurance Issues. Reasonable compensation requirement; FICA applies to W-2 salary only; distributions not subject to FICA; IRC § 199A QBI deduction at 23% (OBBBA, permanent). QBI phase-out thresholds per IRS Notice 2025-67 / Rev. Proc. 2025-45 ($201,775 single / $403,500 MFJ).
5. IRS Topic 409 — Capital Gains and Losses. C-corp 21% flat rate (IRC § 11(b)); qualified dividend rates 0%/15%/20%; NIIT 3.8% under IRC § 1411 on investment income above $200,000/$250,000 MFJ.

SE tax rates, SS wage base ($184,500), QBI rate (23%), standard deductions ($16,100/$32,200), and 2026 income tax brackets verified against IRS.gov, SSA.gov, IRS Rev. Proc. 2025-32, and IRS Notice 2025-67. Values updated June 2026.