Not all businesses are taxed in the same manner. The structure of a business — such as a corporation, partnership, limited liability company (LLC), or sole proprietorship — can change the amount and type of taxes a business owner must pay and how they pay them.
Read on to learn how single-member LLCs are taxed as well as answers to some common LLC tax questions.
What Is a Single-Member LLC?
A single-member LLC is an LLC with only one owner. Single-member LLCs differ from sole proprietorships in a few important ways, but the most significant is that the LLC structure provides limited liability protection to the owner. This protects the owner’s personal assets if the company goes into debt or loses a lawsuit.
By default, the Internal Revenue Service (IRS) treats single-member LLCs as “disregarded entities” for tax purposes. That means they’re subject to “pass-through taxation.”
Pass-through taxation means that all of a company’s profits or losses pass through to its owners’ personal tax returns without first being subject to a separate corporate tax.
Single-member LLCs — along with multi-member LLCs, sole proprietorships, and partnerships — are subject to pass-through taxation by default. LLCs have the option to choose a different type of tax status, which this article will cover later on.
Pass-through taxation comes with a number of pros and cons, which you can review in this guide to LLC pass-through taxation.
Owners of single-member LLCs are responsible for two types of federal taxes: income tax and self-employment tax.
- Income Tax: When a single-member LLC is taxed as a “disregarded entity,” the profits or losses of the company pass through to the owner’s personal tax return. The tax rate on this amount depends on the owner’s personal income tax bracket. However, as part of the Tax Cuts and Jobs Act of 2017, owners can deduct up to 20% of an LLC’s qualified business income (QBI) on their personal tax return with certain restrictions.
- Self-Employment Tax: In addition to the standard personal income tax rate, owners of single-member LLCs must pay the self-employment tax. This tax covers Social Security and Medicare taxes. The current rate is 15.3%. When someone works for a company as an employee, their employer covers half of this amount. Because owners of single-member LLCs are self-employed, they must cover both the employee’s and the employer’s shares.
There are several forms related to filing federal taxes for a single-member LLC. While you may not need all of them, they can include:
- Form 1040: This is for reporting your individual income tax (required).
- Schedule C: This is for reporting income specifically from your business, including profits and losses (required).
- Schedule SE: This is for filing and paying your self-employment taxes (required).
- Schedule E: This is for reporting income from rental properties and other investments (when applicable).
In addition to federal income tax and self-employment tax, single-member LLCs may have to pay some — or all — of the following state taxes:
Income Tax: Just like with federal income tax, the profits or losses of a single-member LLC will pass through to the owner’s personal income tax return. The tax rate varies from state to state, and some states don’t have an income tax at all.
Employer Taxes: If your single-member LLC has employees, you likely will have to register for employer taxes. These taxes cover things like workers’ compensation and unemployment insurance.
Franchise Tax: Some states require LLCs to pay an additional franchise tax (sometimes called a business excise tax or privilege tax). This tax is a flat rate in some states while other states base it on an LLC’s revenue or another financial metric.
Sales Tax: If your LLC sells a product, you likely will have to pay a state sales tax. The rate varies from state to state, and a handful of states don’t have a sales tax.
Other Single-Member LLC Tax Status Options
While the IRS considers LLCs as “disregarded entities” and therefore subject to pass-through taxation by default, LLCs have the option to be taxed as either a C corporation (C corp) or an S corporation (S corp).
Each has certain pros and cons, and they may or may not be the best option for your single-member LLC.
- C corp: Under this structure, the company pays a corporate tax on net income (the current federal tax rate is 21%) and then distributes the profits to shareholders as dividends. Shareholders must then pay income tax on these dividends. For this reason, corporations are said to face “double taxation.” However, with this structure, the company can retain earnings for business expenses that will only be subject to the corporate tax.
- S corp: With an S corp designation, an LLC’s profits and losses will still pass through to the owner’s personal income tax return. However, owners only have to pay self-employment tax on the portion of the profits allocated as salary. They can take additional distributions from the company’s profits that aren’t subject to self-employment tax. An S corp also can retain earnings for business expenses.
Read more about C corp and S corp designations in our guide to corporations.
Single-Member LLC EIN
A single-member LLC will need an Employer Identification Number (EIN) if it has employees OR if it elects to be taxed as a C corp or an S corp. However, it may be a good idea to register for an EIN even if your single-member LLC doesn’t have employees and isn’t taxed as a corporation.
There are several benefits to having an EIN, including increasing your privacy and preparing your business in case you decide to hire employees in the future.
For more information, visit our guide to EINs.
Single-Member LLC Tax FAQ
Do single-member LLCs pay quarterly taxes?
Yes. Owners of single-member LLCs must pay estimated quarterly income tax to the IRS.
Does a single-member LLC have to pay self-employment tax?
Yes. Owners of single-member LLCs must pay a self-employment tax of 15.3% by default. If the LLC elects to be taxed as a C corp or an S corp, the overall self-employment tax payment could potentially be lower.
What is the single-member LLC tax rate?
There is no specific single-member LLC tax rate. Owners of single-member LLCs — “disregarded entities” subject to pass-through taxation — pay a tax on their business profits equal to their personal income tax rate.
Is there a single-member LLC tax form?
Owners of single-member LLCs file taxes with their personal tax return, using Form 1040, Schedule C, Schedule SE, and Schedule E (if applicable).