Building Your Business Becoming an Owner Business Types How Does a Limited Liability Company Pay Income Tax? By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 20, 2022 Fact checked by Lars Peterson Fact checked by Lars Peterson Website Lars Peterson is a veteran personal finance writer and editor with broad experience covering personal finance, particularly credit cards, banking products, and mortgages. He has been writing and editing for more than 20 years and has a knack for digging deep into a subject so he can make it easier for others to understand. As an editor for The Balance, he has assigned, edited, and fact-checked hundreds of articles. learn about our editorial policies In This Article View All In This Article Single-member LLC Income Tax Multiple-member LLC Income Tax LLC's as Corporations or S Corps LLCs and Rental Real Estate Income LLC Owners Self-Employment Tax LLC's and State Income Tax Photo: gece33 / Getty Images A limited liability company (LLC) is a form of business organization recognized by all states. Forming an LLC provides limited liability protection for owners (called "members"), who are taxed at their personal tax rates. How a limited liability company pays income tax depends on whether the LLC has one member or several members and whether the LLC elects to be treated as a different business form for tax purposes. The Internal Revenue Service doesn't recognize LLCs for tax purposes. So how does an LLC pay income tax? Key Takeaways A Limited Liability Company (LLC) is a type of business organization that provides some liability protection to its owners, who are taxed at their personal tax rates.An LLC does not pay income taxes; rather, income is passed to the LLC's members, and they report and pay tax.Even though an LLC does not pay tax itself, it still must report its income to the IRS using an "information" return.Individual U.S. states may treat LLC income and taxation differently than the federal government does. How a Single-Member LLC Pays Income Taxes The IRS considers a single-member LLC as a disregarded entity. In other words, the LLC is not separate from the owner for income tax purposes. Being a disregarded entity means that the LLC is taxed in the same way as a sole proprietorship. That is, the information about the LLC's income and expenses, and its net income is calculated by preparing a Schedule C. The net income from the Schedule C is brought over to the owner's personal tax return (Form 1040 or 1040-SR). Note To start an LLC, you must register with the state where you want to do business, by filing Articles of Organization (or similar application) with the state. How a Multiple-Member LLC Pays Income Taxes An LLC that has more than one member typically pays income tax as a partnership. The partnership itself does not pay taxes directly to the IRS; the individual partners pay tax based on their share of ownership in the partnership. Reporting your income as an LLC member has several steps: The partnership files an information return with the IRS on Form 1065. You receive a Schedule K-1 is prepared for each partner, showing your share of the profit or loss of the partnership. You must transfer Schedule K-1 information to Schedule E - Supplemental income. The Schedule K-1 you receive from your LLC breaks down your income into different types, and each type of income goes in a specific place on Schedule E. Include the income from your Schedule E in the right place on your Form 1040 or 1040-SR. Note The IRS considers income from rental real estate, including Airbnb-type income, as passive income. Losses from normal business activity aren't limited, but losses from passive income are limited if you don't participate in the business, so you must report this income separately. Income Tax for LLC's classified as Corporations or S Corporations Some LLCs choose to be taxed as a corporation or S corporation. Usually, businesses usually make this choice (called an "election") because it results in lower taxes for high-income individuals. The election is submitted through IRS Form 8832 - Entity Classification Election. Making this tax election doesn't change how your LLC operates; it just changes the way you pay taxes. Your LLC continues to operate as an LLC, following the company's operating agreement. LLCs and Rental Real Estate Income If all or part of your income as an LLC member LLCs must use Schedule E to report supplemental income for Form 1040 instead of Schedule C. Supplemental income is income from rental real estate or royalties owned by the LLC, including Airbnb-type activities. LLC Owners and Self-Employment Tax LLC owners commonly get income from business operations. This income is considered self-employment income and it's subject to self-employment tax (Social Security and Medicare). You must complete Schedule SE to calculate how much you owe, based on your business net income. The total is added to your other income on your personal tax return. Schedule E income from rental real estate income (Box 2 of Schedule E) generally isn't subject to self-employment tax. It's considered passive activity (not active, as a business) and LLC member income from this passive activity may be subject to passive loss limitation rules. How LLC's Pay State Income Tax Each state has a different way of classifying LLCs for state income tax purposes. After you have figured out your LLC's tax status, you can go to your state's department of revenue to find out how your state might be taxed. You will need to look at two factors: What is the tax based on? Most states use the federal income tax liability as a basis, but states modify that basis for their state tax.How does the LLC's tax classification (sole proprietor, partnership, S corporation, or corporation) affect the state income tax? Some states call their income tax a franchise tax. Other states may charge LLCs a gross receipts tax rather than an income tax. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Publication 3402 Taxation of Limited Liability Companies." IRS. "Partner's Instructions for Schedule K-1 (Form 1065)." Pages 7-8. IRS. "LLC Filing as a Corporation or Partnership." IRS. "Instructions for Schedule E Supplemental Income and Loss."