LLC Tax Rate: How It's Calculated & How to Lower It

Running your business as a limited liability company (LLC) has many benefits, but it also means you'll be facing a tax bill that shifts your: 

• Business profits

• Elections

• ZIP code

While you may have heard mention of an "LLC tax rate," the reality is that there is no single rate. Instead, owners and entrepreneurs layer federal income tax, self-employment tax, state levies, and elections, such as the S corporation election, onto one another—creating a personal “tax stack.” Understanding every piece of that stack is the first step toward shrinking your LLC tax liability.

Use this guide to understand your LLC's specific tax rate, including how it's calculated, along with tactics to lower your overall liability. 

Key Highlights

• The default LLC structure is a pass-through, so profits flow to the owners’ personal income tax return and get taxed at their individual bracket.

• On top of federal income tax, most owners owe a 15.3% self-employment tax on net earnings.

• Electing S corporation status can convert part of that self-employment liability into distributions not subject to payroll taxes—if salary and compliance rules are met.

• State income, franchise, or gross-receipts taxes vary widely; some states charge zero percent, while others add several percentage points.

• The 20% Qualified Business Income (QBI) deduction for pass-throughs is now permanent, raising the stakes for proactive planning.

• Accurate books, quarterly estimates, and year-round advice can slash surprises at tax time.

• A dedicated CPA or accounting team can help you compare entity choices, defend your interests during an audit, and routinely adjust your tax stack to conform to new laws while meeting or exceeding yearly growth goals.

Understanding How LLCs Are Taxed by Default

Pass-through taxation is the default setting for LLCs. Your LLC must file an informational return, only for informational purposes, but the income itself “passes through” to the owners’ Internal Revenue Service (IRS) Form 1040, U.S. Individual Income Tax Return.

Federal Income Tax Rates for 2025-26

(Thresholds roughly double for married filing joint returns.)

Federal taxes for single vs. multi-member LLCs

If you operate your business as a single-member or multi-member LLC, you're taxed by default and require specific tax forms. 

• A single-member LLC is taxed as a sole proprietorship, Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), by default.

• A multi-member LLC is taxed as a partnership, Form 1065, U.S. Return of Partnership Income,  (Form 1065) by default, with each LLC member reporting their share of income on their personal tax returns.

In both cases, the income is subject to the owner's individual federal income tax bracket, ranging from 10% to 37%.

Self-employment tax

LLC income is also subject to 15.3% self-employment tax—12.4% for Social Security (up to the annual wage base) and 2.9 percent for Medicare taxes, with an extra 0.9 percent surtax above $200,000 in wages or net earnings. W-2 employees contribute 7.65% of their income to these programs, with their employers matching that amount.

While half of the self-employment tax burden can be deducted, this liability is often larger than the owner’s federal income tax burden. Because of this, it drives many owners to consider other entity elections.

Optimizing Your LLC Tax Rate with Strategic Elections

LLCs are remarkably flexible. By filing IRS Form 2553, Election by a Small Business Corporation, or IRS Form 8832, Entity Classification Election, you can elect to be taxed as an S corporation or C corporation while keeping the legal shield of an LLC.

Using the S Corporation election to mitigate self-employment tax

Under an S corp election, you pay yourself a “reasonable salary.” Payroll taxes apply only to that salary; remaining profits flow through as dividends, not subject to self-employment tax. The math often makes sense once the business clears roughly $60-$80k in annual net earnings, but the break-even varies. Owners must:

• Run regular payroll and file quarterly returns.

• Maintain corporate formalities such as minutes, bylaws, and other materials.

• Track basis carefully to avoid distribution pitfalls.

The decision to form as an S corp is a strategic analysis best made with professional guidance. A CPA or accounting professional can build a salary-versus-distribution model and handle the compliance workload on your behalf. See our affordable, tax-deductible business tax advisory service to get started.

The C Corporation election for growth-focused LLCs

Choosing C corp treatment locks in a flat 21% federal corporate tax rate, with a second layer tax on dividends. This is a specialized strategy for founders planning to reinvest most profits back into the business; this flat rate can free up cash flow. Capital gains upon exit are taxed to the shareholder, currently at:

Double taxation and additional formalities make this a niche play best weighed with professional guidance.

Navigating the Full Spectrum of LLC Tax Obligations

Other critical tax considerations impact an LLC's total liability beyond federal income tax.

State-level LLC taxes: Income, franchise, and gross-receipts taxes

State tax rules and laws can vary significantly. For example, California imposes a minimum $800 franchise tax plus state income tax up to 13.3%, whereas Wyoming charges only a small fee. Texas applies a margin (gross-receipts-style) tax instead of income tax.

Expanding remotely can create “nexus”—the duty to file and pay in multiple states. Our small business advisory team with state-specific expertise monitors all 50 jurisdictions, ensuring compliance in every state your LLC operates in. 

Leveraging the Qualified Business Income deduction

Until recently, the QBI deduction, which allows pass-through entity owners to deduct up to 20% of qualified business income for tax purposes, was set to expire after the 2025 tax year. However, with the passage of the One Big Beautiful Bill Act, this deduction has been made permanent.

Because of this, small business owners, typically with the help of qualified tax professionals, shifted from a short-term strategy to manage this deduction to other methods to support long-term QBI success. 

Best Practices for Year-Round Tax Management

It's essential to embrace best practices and protocols for staying compliant and optimizing business tax outcomes throughout the year.

Keep accurate books

Accurate, up-to-date books are the foundation for every deduction and tax credit. Full-service bookkeeping solutions, such as those offered by 1-800Accountant, will keep your materials up-to-date and error-free.

When you trust 1-800Accountant with your books, transactions are automatically and efficiently categorized, which your designated bookkeeper verifies each month. That audit-ready ledger powers strategic decisions and prevents overstated profit, among other crucial advantages. 

The power of proactive tax planning

Waiting until March or later to total receipts not only leaves money on the table, but also leaves you stressed as you scramble toward tax day.

Quarterly reviews with a tax advisor uncover opportunities such as:

• Retirement contributions

• Vehicle depreciation

• Timing equipment purchases

Regular check-ins also dial in estimated payments, preventing both penalties and unwelcome April surprises..

How Professional Expertise Unlocks Maximum Tax Savings

Partnering with tax professionals experienced in your state and industry transforms tax compliance from a burden into a strategic advantage over competitors.

Choosing the right structure from day 1

Business entity selection influences: 

• Payroll obligations

• Liability exposure

• Future tax strategy 

Our entity formation team can analyze your business situation and create a comparison illustrating sole proprietorship, partnership, S corp, and C corp scenarios, ensuring you launch on the strongest footing.

Teaming up with a dedicated tax professional

While an accounting generalist will be able to provide some basic services, they are no replacement for a dedicated accountant or team who knows the nuances of your industry and state. They should have the capacity to:

• Deliver year-round guidance

• Handle quarterly estimates

• Routinely identify deductions that are often overlooked

This relationship with your designated accountant or team moves beyond simple filing to a partnership focused on maximizing savings, ensuring full compliance, and achieving an average tax refund that can be four times the cost of the tax-deductible service.

Navigating audits and IRS inquiries with confidence

Audits can happen for any reason, which is stressful for any business owner. Should the IRS knock, audit defense helps ensure your materials are in order and that your interests are defended during a difficult time. 

Achieve Tax Clarity and Confidence with 1-800Accountant

Your LLC tax rate is not one number; it is a moving target shaped by:

• Elections

• Thresholds

• Proactive choices

When you trust 1-800Accountant, America's leading virtual accounting firm, with your LLC's complex financial work, we designate a team of accounting professionals backed by powerful technology so you can engineer, monitor, and continually improve that tax stack.

Our suite of affordable, tax-deductible financial solutions includes year-round tax advisory and bookkeeping powered by dedicated professionals with state-level expertise, ensuring a comprehensive solution built for navigating LLC tax complexity.

Schedule a free consultation with an LLC business expert today to begin creating a tax strategy that fuels long-term growth and success.

FAQs for LLC Tax Rates

How do LLC tax rates change if I add new members or investors?

A new member converts a single-member LLC into a partnership by default, shifting reporting from Schedule C to IRS Form 1065 and bringing Schedule K-1s, guaranteed payments, and potential self-employment considerations.

You may also need to update your business's operating agreement. 

What are the tax implications if I operate in multiple states?

Operating in multiple states can lead to complex tax obligations depending on the region. Some states may impose more onerous taxes on businesses in comparison to other states. If you do operate in multiple states, you may owe income or franchise tax in each state where you establish economic nexus—often triggered by revenue thresholds, employees, or inventory. 

Can I switch my LLC’s tax classification after the first year?

There are windows where it is optimal to switch your LLC's tax classification. For example, once you've formed an LLC, you have 75 days to select a different business structure for your business. You may file IRS Form 2553 or IRS Form 8832 to elect S corp or C corp treatment, within that period. Late elections are sometimes accepted with reasonable-cause statements.

How do estimated quarterly tax payments work for LLC owners?

Self-employed individuals and business owners who are paid without taxes withheld, the opposite of a W-2 employee, must calculate and submit quarterly estimated taxes four times per year by April 15, June 15, September 15, and January 15. 

Pass-through owners typically calculate and submit payment via IRS Form 1040-ES, Estimated Tax for Individuals. C corps use IRS Form 1120-W,  Estimated Tax for Corporations. Underpayments can incur penalties and interest.

What are the most common mistakes that increase an LLC’s tax bill?

LLC owners who calculate and submit business taxes themselves are prone to making common mistakes that will increase their tax bill. Top mistakes include missing estimated payments, neglecting payroll for S corp salaries, and poor record-keeping that leaves deductions unclaimed.

How do business deductions for LLC owners differ from those for sole proprietors or corporations?

Pass-through LLC owners may qualify for the QBI deduction, while C corp owners do not. The home office deduction isn't typically available to C corps, nor can personal business expenses be deducted outside of the corporate income tax level.