If you're running an LLC or thinking about starting one, you've probably wondered how the tax situation works.
LLCs are incredibly popular business structures because they offer flexibility and protection, but that flexibility extends to how you get taxed, too.
Unlike other business types that have one clear tax path, your LLC can be taxed in several different ways, and each option comes with its own set of rates, rules, and requirements.
Whether you're a solo entrepreneur running a single-member LLC, part of a multi-member operation, understanding your options is crucial for your bottom line.
In this comprehensive guide, you'll discover exactly how LLC taxation works, what the new 2025 rates mean for your business, and how different states handle LLC taxes.
What is an LLC?
An LLC, or Limited Liability Company, is one of the most popular business structures in the United States, and for good reason.
When you form an LLC, you're creating a separate legal entity that stands apart from you personally, which means your personal assets, like your home, car, and personal bank accounts, are generally protected if your business runs into legal or financial trouble.
This protection is called the "corporate veil," and it's one of the biggest reasons entrepreneurs choose the LLC structure over operating as a sole proprietor.
And the best part about LLCs? They're incredibly flexible.
Unlike corporations, which have strict requirements for board meetings, shareholder agreements, and corporate formalities, LLCs let you run your business with much less red tape.
How are LLCs taxed?
Unlike most business structures that have one way of being taxed, your LLC can actually choose from several different tax treatments.
The IRS calls this making a "tax election," and the choice you make can significantly impact how much you pay in taxes each year.
By default, the IRS automatically assigns your LLC a tax classification based on how many members you have, but you're not stuck with that default. You can file an election to change how your LLC is taxed, and this flexibility is one of the biggest advantages of the LLC structure.
Let's break down each option so you can understand what works best for your situation.
Single-Member LLC
If you're the only owner of your LLC, the IRS automatically treats your business as what's called a "disregarded entity" for tax purposes.
It doesn't mean the IRS is ignoring your business. It simply means that for tax purposes, your LLC is treated as if it doesn't exist as a separate entity from you personally.
This means all of your business income and expenses flow directly onto your personal tax return using Schedule C (Profit or Loss from Business). You'll report your LLC's profits as self-employment income, and you'll need to pay both income taxes and self-employment taxes on those profits.
Self-employment tax covers your Social Security and Medicare contributions, and it's currently 15.3% on the first $160,200 of income for 2025.
The downside? You'll pay self-employment tax on all of your LLC's profits, even if you don't actually take that money out of the business. This can add up to a significant tax burden as your profits grow.
Multi-Member LLC
When your LLC has two or more members, the IRS automatically classifies it as a partnership for tax purposes.
This means your LLC will need to file Form 1065 (Partnership Return) each year, but here's the key point: the LLC itself still doesn't pay federal income tax.
Instead, the partnership return is purely informational. It shows the IRS how much income and loss the LLC generated, and then issues each member a Schedule K-1 that breaks down their share of the profits, losses, deductions, and credits. Each member then reports their portion on their personal tax return.
This system gives you tremendous flexibility in how you distribute profits and losses among members.
Unlike corporations, where everything is typically distributed based on ownership percentages, LLCs can have "special allocations."
For example, if you have a 50-50 LLC with a partner, you could still allocate 60% of the profits to one member and 40% to the other, as long as it's documented in your operating agreement and meets IRS requirements.
LLC Taxed as an S Corp
Your LLC can elect to be taxed as an S Corporation by filing Form 2553 with the IRS.
This election can potentially save you thousands of dollars in self-employment taxes, especially as your profits grow.
Here's how it works: when your LLC elects S Corp taxation, you become an employee of your own business. You'll need to pay yourself a reasonable salary through payroll, complete with payroll taxes, W-2s, and all the usual employment tax withholdings.
However, any profits beyond your salary can be distributed to you as "distributions," and these distributions aren't subject to self-employment tax.
Let's say your LLC makes $100,000 in profit, and you pay yourself a $60,000 salary (which must be reasonable for the work you do). You'd pay employment taxes on that $60,000 salary, but the remaining $40,000 can be distributed to you without additional self-employment taxes. This can save you over $5,000 in taxes annually.
The catch? You'll need to run payroll, which means additional complexity and costs.
LLC Taxed as a C Corp
Your LLC can also elect to be taxed as a C Corporation by filing Form 8832.
This is the least common election for smaller LLCs, but it might make sense in specific situations.
With C Corp taxation, your LLC becomes subject to "double taxation." The business pays corporate income tax on its profits (currently 21% for federal taxes), and then you pay personal income tax on any distributions you receive from the company.
Why would anyone choose this? A few reasons.
First, C Corps can retain earnings in the business at a relatively low 21% tax rate, which might be lower than your personal tax rate if you're a high earner.
Second, there are certain fringe benefits (like health insurance) that can be fully deductible for C Corp owners.
Third, if you're planning to seek outside investment or eventually go public, a C Corp structure is what most investors expect.
However, for most small to medium-sized LLCs, the double taxation makes this election less attractive than the other options. You'd typically only consider this if you're planning to keep significant profits in the business for future growth, or if you have specific strategic reasons related to investors or acquisitions.
2025 Federal Tax Brackets for LLC Owners
The IRS adjusts tax brackets annually for inflation, and the 2025 brackets reflect these cost-of-living adjustments.
Here's what you need to know: these brackets apply to your taxable income after you've taken all your deductions, including business expenses, standard or itemized deductions, and any other eligible write-offs.
It's important to remember that the U.S. uses a progressive tax system, which means you don't pay the same rate on every dollar you earn. Instead, different portions of your income get taxed at different rates as you move through the brackets.
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 - $11,925 | $0 - $23,850 | $0 - $17,000 |
| 12% | $11,925 - $48,475 | $23,850 - $96,950 | $17,000 - $64,850 |
| 22% | $48,475 - $103,350 | $96,950 - $206,700 | $64,850 - $103,350 |
| 24% | $103,350 - $197,300 | $206,700 - $394,600 | $103,350 - $197,300 |
| 32% | $197,300 - $250,525 | $394,600 - $501,050 | $197,300 - $250,500 |
| 35% | $250,525 - $626,350 | $501,050 - $751,600 | $250,500 - $626,350 |
| 37% | $626,350+ | $751,600+ | $626,350+ |
Remember, these rates apply to your taxable income, which is your total income minus deductions – not your gross business income.
State Business Tax Rates for LLCs
While federal taxes apply to all LLCs regardless of where they're formed, state taxes can vary dramatically and significantly impact your bottom line.
Some states welcome businesses with open arms and minimal tax burdens, while others impose substantial fees and taxes that can eat into your profits. Understanding these differences is crucial when deciding where to form your LLC, especially if you have flexibility in your business location.
The state where you form your LLC isn't necessarily where you'll pay taxes – it's generally where you do business that matters.
However, some states are more business-friendly than others, and choosing the right state can save you thousands of dollars annually.
States with High LLC Taxes
California
California is notorious among entrepreneurs for having some of the highest LLC taxes and fees in the country.
If your LLC does business in California, you'll face several mandatory costs that can quickly add up.
- Annual Franchise Tax - Every LLC that is doing business or organized in California must pay an annual tax of $800. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC. This $800 fee is mandatory regardless of whether your LLC made any money during the year, which can be particularly burdensome for new or struggling businesses.
- Additional LLC Fee - Beyond the $800 franchise tax, California imposes an additional fee based on your LLC's gross income. LLCs making more than $250,000 in a year are also subject to an additional LLC fee, one that increases based on your LLC's income.
- Filing Requirements - California LLCs must file Form 568 annually, and the filing deadlines are strict. Missing these deadlines can result in penalties and interest charges that compound over time.
New York
New York takes a different approach from California but still imposes significant costs on LLCs operating in the state.
The fees are based on gross income from New York sources, which can catch many business owners off guard.
Annual Filing Fee - The amount of the filing fee will be based on the New York source gross income for the tax year immediately preceding the tax year for which the fee is due (preceding tax year). If an LLC or LLP did not have any New York Source gross income for the preceding tax year, the filing fee is $25.
For LLCs with higher revenues, the fees increase substantially:
- $0 - $100,000: $25
- $100,000 - $250,000: $50
- $250,000 - $500,000: $175
- $500,000 - $1,000,000: $500
- $1,000,000 - $5,000,000: $1,500
- $5,000,000 - $25,000,000: $3,000
- Over $25,000,000: $4,500
Biennial Statement - As of 2023, the filing fee is $9. You must submit the statement every two years within the calendar month that the original articles of organization were filed.
Publication Requirement - New York also requires newly formed LLCs to publish notice of their formation in designated newspapers, which can cost hundreds to thousands of dollars depending on the county.
States with Mixed or Moderate LLC Taxes
Delaware
Delaware has built a reputation as the corporate capital of America, and while it offers many advantages for businesses, it comes with moderate costs that fall between high-tax and no-tax states.
- Annual Franchise Tax - LLCs, LPs, and GPs are not required to file Annual Franchise Tax reports with the Division of Corporations; they must pay the $300 yearly tax on or before June 1st.
- Formation Costs - The Delaware LLC fees include $90 to the state for filing your Delaware LLC formation.
- No Sales Tax - Five states forego statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. This can be a significant advantage for businesses that sell products, as you won't need to collect and remit sales tax to the state.
Nevada
Nevada positions itself as a business-friendly alternative with moderate costs and strong privacy protections for business owners.
- No State Income Tax - Like Florida and Texas, Nevada does not impose a state income tax. However, businesses in Nevada must pay an annual business license fee and may be subject to a modified business tax based on gross wages paid to employees.
- Business License Fee - While Nevada doesn't have a traditional franchise tax, businesses must pay an annual business license fee. The exact amount varies based on your business type and gross revenue.
- Modified Business Tax - If your LLC has employees, you may be subject to Nevada's Modified Business Tax, which is calculated based on gross wages paid to employees.
States with Low or No LLC Taxes
Florida
Florida has positioned itself as one of the most business-friendly states in the country, particularly for LLCs. Florida is one of the most popular states for LLC formation because it has no state income tax policy for LLCs.
However, businesses in Florida are still subject to an annual franchise tax based on gross receipts.
- No State Income Tax - This is Florida's biggest advantage for LLC owners. Your LLC's profits won't be subject to state income tax, which can result in significant savings, especially as your business grows.
- Annual Report Fee - Florida LLCs must file an annual report, but the fee is relatively modest compared to high-tax states.
- Sales Tax - States like Texas and Florida are known for having broad sales tax provisions that apply to a wide range of goods and services, so if you sell products or certain services, you'll need to collect and remit sales tax.
The combination of no state income tax, reasonable filing fees, and access to a large and growing market makes Florida attractive for many LLC owners, particularly those in service-based industries.
Texas
Texas takes pride in its business-friendly environment and has structured its tax system to attract entrepreneurs and established businesses alike.
- No State Income Tax - Texas also has no state income tax on LLCs, which can significantly reduce the tax burden for business owners.
- Franchise Tax (Margin Tax) - LLCs in Texas may benefit from the state's lack of traditional corporate and personal income taxes, but are subject to the Texas Margin Tax if gross receipts exceed a certain threshold (currently $1,230,000). This tax only applies to larger businesses, so many small to medium-sized LLCs won't owe this tax at all.
- No Annual Report Fee - Unlike many states, Texas doesn't require LLCs to file annual reports, which saves both time and money. The Texas Franchise Tax is calculated on the lesser of total revenue or 70% of total revenue, with various deductions available.
Texas calculates its tax rate on the lower of total revenue or 70% of revenue, providing deductions for industries with higher overhead costs. This tax structure makes Texas an appealing location for LLCs focused on growing revenue without corporate income taxes.
Key Takeaway?
When choosing where to form your LLC, consider not just the upfront formation costs, but the ongoing annual fees, tax implications, and additional requirements like publication or annual reports.
While high-tax states like California and New York offer access to large markets and business infrastructure, low-tax states like Florida and Texas can provide significant savings that compound over time.
The key is matching your business needs with the right state's advantages while understanding the total cost of compliance.
Additional taxes for LLC owners
Beyond income taxes, there are several other tax obligations you might face as an LLC owner that can significantly impact your overall tax burden.
These additional taxes often catch new business owners off guard because they're not as widely discussed as income tax, but they're just as important to understand and plan for.
Payroll Taxes
If your LLC has employees – including yourself if you've elected S Corp taxation – you'll need to navigate the world of payroll taxes.
These taxes fund Social Security, Medicare, and unemployment insurance programs, and they're split between employers and employees.
- Social Security and Medicare Taxes (FICA) - When you have employees, you're responsible for withholding and paying both the employee and employer portions of Social Security and Medicare taxes. For 2025, Social Security tax is 6.2% each for employer and employee (12.4% total) on wages up to $160,200. Medicare tax is 1.45% each for employer and employee (2.9% total) on all wages, with no income limit.
- Additional Medicare Tax - There's also an additional 0.9% Medicare tax on wages over $200,000 for individual taxpayers ($250,000 for married filing jointly). This additional tax is only paid by the employee – there's no employer match.
- Federal Unemployment Tax (FUTA) - As an employer, you'll pay FUTA tax at a rate of 6.0% on the first $7,000 of each employee's wages. However, you can claim a credit of up to 5.4% for state unemployment taxes you pay, bringing the effective FUTA rate down to 0.6% in most cases.
- State Unemployment Tax (SUTA) - Each state sets its own unemployment tax rates and wage bases. These rates can vary significantly based on your industry, your company's layoff history, and the state where you operate. New employers typically start with a standard rate that can be adjusted up or down based on their experience.
- Payroll Tax Deposits - You can't just wait until the end of the year to pay these taxes. Depending on your payroll size, you'll need to deposit payroll taxes either monthly or semi-weekly. The IRS has strict deadlines, and missing them can result in substantial penalties.
- Workers' Compensation - While not technically a tax, most states require employers to carry workers' compensation insurance to cover employees who are injured on the job. The cost varies by industry and your company's safety record.
- Special Considerations for S Corp Elections - If your LLC elects S Corp taxation, you become an employee of your own business and must run payroll for yourself. This means paying both sides of payroll taxes on your reasonable salary, but it also means the remaining profits can be distributed to you without additional self-employment tax. This is often where the S Corp election becomes advantageous for profitable LLCs.
Sales Tax
Sales tax can be one of the most complex tax obligations for LLC owners, especially if you sell products or services in multiple states.
The rules vary significantly by state and locality, and the rise of e-commerce has made compliance even more challenging.
When You Need to Collect Sales Tax - You're generally required to collect and remit sales tax when you have "nexus" (a connection) with a state. Nexus can be established through:
- Having a physical presence (office, warehouse, employees) in a state
- Reaching certain sales thresholds in a state (economic nexus)
- Having affiliates or other connections in a state
Economic Nexus Thresholds - Following the 2018 Supreme Court decision in South Dakota v. Wayfair, states can now require out-of-state businesses to collect sales tax if they exceed certain sales thresholds. Most states have set thresholds around $100,000 in sales or 200 transactions annually, but these vary by state.
What's Taxable - Not all products and services are subject to sales tax, and the rules vary by state. Generally, physical products are taxable, while many services are not. However, some states tax certain services like repairs, personal services, or digital products. States like Delaware, Montana, New Hampshire, and Oregon don't have statewide sales tax at all, while others like Alaska only allow local sales taxes.
Sales Tax Rates - Sales tax rates can include state, county, and local portions. For example, California has a base state rate of 7.25%, but local jurisdictions can add additional taxes, resulting in combined rates that can exceed 10% in some areas. You'll need to charge the correct rate based on where your customer is located (destination-based) or where your business is located (origin-based), depending on the state's rules.
Filing and Remitting - Most states require you to file sales tax returns monthly, quarterly, or annually, depending on your sales volume. You'll need to:
- Register for a sales tax permit in each state where you have nexus
- Collect the appropriate amount of sales tax from customers
- File returns by the deadline (even if you had no sales)
- Remit the collected tax to the state
Exemptions and Certificates - Some customers are exempt from sales tax, such as other businesses buying items for resale or nonprofit organizations. You'll need to collect and maintain valid exemption certificates to support these non-taxed sales.
How to Prepare and File Taxes as an LLC
Filing taxes as an LLC doesn't have to be overwhelming, but it does require organization and understanding of the process.
Here's your step-by-step roadmap to successfully prepare and file your LLC taxes, minimize your tax burden, and avoid costly mistakes that could trigger audits or penalties.
Step 1 - Record business spending throughout the tax year
The foundation of good tax preparation starts with meticulous record-keeping throughout the year.
- Set up a business accounting system immediately. You don't need expensive software to start. Simple solutions like QuickBooks Online, FreshBooks, or even a well-organized spreadsheet can work for smaller LLCs.
- Separate business and personal expenses from day one. Open a dedicated business bank account and get a business credit card. This separation is crucial not only for tax purposes but also for maintaining your LLC's liability protection.
- Track every business expense, no matter how small. That $3 coffee during a client meeting, the $15 parking fee for a business conference, or the $50 office supplies purchase – they all add up.
- Document the business purpose of each expense. The IRS requires that business expenses be "ordinary and necessary" for your trade or business. For each expense, note what it was for, who was involved (if it's a meal or entertainment), and how it relates to your business. This documentation becomes crucial if you're ever audited.
Step 2 - Collect your financial records
As tax season approaches, it's time to gather all the financial information you've been tracking throughout the year.
This step is much easier if you've been diligent about record-keeping, but even if you haven't, there's still time to get organized.
- Gather all income records. Collect 1099s from clients who paid you more than $600, bank statements showing deposits, credit card processing statements, cash receipts, and any other documentation of money coming into your business.
- Compile expense documentation. Organize receipts by category (office supplies, travel, meals, professional services, etc.) or by month, whichever system works better for you. Make sure you have receipts for all significant expenses and can explain the business purpose of each.
- Reconcile bank and credit card statements. Go through each statement line by line to ensure you've captured all business income and expenses. Look for automatic payments, bank fees, or other transactions you might have missed during your regular bookkeeping.
- Collect employment tax records. If you have employees, gather all payroll records, including wages paid, taxes withheld, and employer tax payments made. You'll also need Forms W-2 for employees and 1099s for contractors who were paid more than $600.
- Review investment and asset records. If your LLC bought equipment, vehicles, or other assets during the year, collect purchase receipts, loan documents, and depreciation schedules. If you sold any assets, you'll need the original purchase price and sale documentation to calculate gain or loss.
- Create a summary document. Prepare a simple spreadsheet or document that summarizes your total income by source and total expenses by category. This will make completing your tax forms much faster and help you spot any missing information.
Step 3 - Identify the proper tax forms to file
The forms you need to file depend on your LLC's tax election and the number of members. Getting this wrong can lead to processing delays, penalties, or missed opportunities for tax savings.
- Single-Member LLC (Default Taxation): If you're the sole owner and haven't made any special tax elections, you'll report your LLC's income and expenses on Schedule C (Profit or Loss from Business) attached to your personal Form 1040. You'll also need Schedule SE (Self-Employment Tax) to calculate and pay self-employment tax on your net profit.
- Multi-Member LLC (Default Taxation): Multi-member LLCs are treated as partnerships by default. The LLC must file Form 1065 (U.S. Return of Partnership Income) by March 15th. This return is informational only – the LLC itself doesn't pay federal income tax. Each member receives a Schedule K-1 showing their share of income, deductions, and credits, which they report on their personal tax returns.
- LLC Elected as S Corporation: If your LLC has elected S Corp taxation, you'll file Form 1120S (U.S. Income Tax Return for an S Corporation). Like partnerships, S Corps are pass-through entities, so members receive Schedule K-1s. However, you'll also need to run payroll for any member-employees and file quarterly payroll tax returns (Form 941) and annual unemployment tax returns (Form 940).
- LLC Elected as C Corporation: LLCs electing C Corp taxation file Form 1120 (U.S. Corporation Income Tax Return). Unlike other LLC tax elections, C Corps pay tax at the entity level, and members pay tax again on any distributions they receive. You'll also need payroll tax forms if you have employees.
- Extension Forms: If you need more time to file, you can request an extension. Use Form 7004 for partnerships and corporations, or Form 4868 for individual returns (if you're a single-member LLC filing on Schedule C).
- Amended Returns: If you discover errors after filing, you can file amended returns using Form 1040X for individual returns or Form 1065X for partnership returns. However, it's better to get it right the first time, so take your time and double-check everything.
Step 4 - Maximize your tax deductions
This is where good record-keeping pays off.
Every legitimate business deduction you can claim reduces your taxable income dollar-for-dollar, which means real money saved on your tax bill.
- Home Office Deduction: If you use part of your home exclusively for business, you can deduct home office expenses. You can use the simplified method ($5 per square foot up to 300 square feet) or calculate the actual expenses based on the percentage of your home used for business.
- Business Equipment and Supplies: Deduct the cost of computers, office furniture, software, supplies, and other equipment used in your business. For expensive items, you might need to depreciate them over several years, but Section 179 allows you to deduct up to $1,160,000 of qualifying equipment purchases in 2025.
- Vehicle Expenses: If you use your car for business, choose between the standard mileage rate (67 cents per mile for 2025) or actual expenses including gas, maintenance, insurance, and depreciation. You can't switch methods freely, so choose the one that gives you the bigger deduction and stick with it.
- Professional Services: Deduct fees paid to attorneys, accountants, consultants, and other professional service providers. This includes the cost of tax preparation, legal advice, and business consulting.
- Business Meals: You can deduct 50% of qualifying business meals, but keep detailed records including who you met with, where you ate, the business purpose, and the amount spent. Meals provided to employees on your business premises are 50% deductible, while some employee meals can be 100% deductible.
- Travel Expenses: Business travel costs, including airfare, hotels, car rentals, and 50% of meals while traveling, are deductible. Keep receipts and document the business purpose of each trip.
- Business Insurance: Premiums for business liability insurance, professional liability insurance, and other business-related insurance policies are deductible. If you're self-employed, you may also be able to deduct health insurance premiums for yourself and your family.
- Marketing and Advertising: Website costs, business cards, advertising expenses, trade show costs, and other marketing expenses are deductible. This includes social media advertising, Google Ads, and traditional advertising.
- Startup Costs: If this is your first year in business, you can deduct up to $5,000 in startup costs and $5,000 in organizational costs. Any remaining costs must be amortized over 15 years.
Step 5 - File your tax returns on time
Meeting tax deadlines is crucial for avoiding penalties and interest charges. The IRS doesn't accept "I was busy" as a valid excuse for late filing.
- Know Your Deadlines: Individual returns (including single-member LLCs filing on Schedule C) are due April 15th. Partnership returns (multi-member LLCs) and S Corp returns are due March 15th. C Corp returns are due April 15th. If the due date falls on a weekend or holiday, the deadline extends to the next business day.
- File Extensions if Needed: If you can't meet the deadline, file for an extension before the original due date. This gives you additional time to file (until October 15th for individual returns and September 15th for business returns), but you still need to pay any taxes owed by the original deadline to avoid penalties.
- Pay Estimated Taxes: If you expect to owe more than $1,000 in taxes, you should make quarterly estimated tax payments. For 2025, these are due January 15, April 15, June 16, and September 15. Missing these payments can result in underpayment penalties, even if you file your return on time.
- Choose Your Filing Method: You can file on paper, but electronic filing is faster, more secure, and reduces errors. Most tax software can handle LLC returns, or you can work with a tax professional. If you're filing a partnership or corporate return, electronic filing might be required.
Remember, tax preparation isn't just about compliance – it's about understanding your business's financial performance and making strategic decisions to minimize your tax burden while maximizing your profits.
The time you invest in proper tax preparation throughout the year pays dividends not just in tax savings, but in better business management overall.
Maximize Your Deductions This Tax Season with Virtue CPAs
Understanding LLC tax strategies is one thing – implementing them effectively to save real money is another.
While this guide provides you with the foundation you need, ensuring full compliance requires expertise that goes beyond what any article can cover.
That's where Virtue CPAs comes in. Our team of experienced tax professionals specializes in helping LLC owners like you minimize tax liability while staying fully compliant with all federal and state requirements.
We don't just prepare your returns – we work with you year-round to implement tax-saving strategies, optimize your business structure, and ensure you're taking advantage of every deduction available to your specific situation.
