Single-Member LLC Taxes 2026: How Your LLC is Taxed (And When to Consider S-Corp)

What "Disregarded Entity" Means for Federal Taxes

By default, the IRS treats a single-member LLC as a "disregarded entity" for federal income tax purposes. This means the LLC itself does not file a separate federal income tax return. Instead, all business income and expenses flow directly to the owner's personal Form 1040, just like a sole proprietorship.

The LLC is "disregarded" for tax purposes only. It still exists as a separate legal entity for liability protection purposes at the state level. You can still hold contracts, open business bank accounts, and enjoy some personal liability protection — the IRS just doesn't treat it as a separate taxpayer.

How SMLLC Income Is Taxed

All net business income from your SMLLC flows to:

1. Schedule C (Profit or Loss from Business) — Report gross income and business expenses to arrive at net profit
2. Schedule SE — Calculate self-employment tax (15.3% on 92.35% of net profit)
3. Form 1040 — Net profit is added to your other income and taxed at your marginal federal rate

This is identical to how a sole proprietor files. The only difference: your tax return will show your LLC's name on Schedule C if you're operating under a business name.

Self-Employment Tax Still Applies in Full

One of the most common misconceptions: "My LLC will reduce my SE tax." It won't. A disregarded SMLLC pays SE tax on the same base as a sole proprietor — all net profit is subject to the full 15.3% SE tax rate (on 92.35% of profit).

The only way to reduce SE tax through entity structure is to elect S-Corp treatment. See below.

LLC vs. Sole Proprietor: What Actually Differs (and What Doesn't)

Bottom line: A SMLLC provides legal benefits (liability protection) but NO federal tax benefits compared to a sole proprietorship by default.

When to Consider S-Corp Election

An SMLLC can elect to be taxed as an S-Corporation by filing Form 2553. With S-Corp treatment:

• You pay yourself a "reasonable salary" (W-2 wages) — these are subject to payroll taxes (FICA)
• Remaining profits pass through as a distribution — not subject to SE tax
• Savings come from reducing the SE-taxable portion of income

However, S-Corp comes with real costs and complexity: payroll tax filings (941), separate corporate tax return (Form 1120-S), payroll service ($1,000–$3,000/year), state compliance fees. Typically, S-Corp election only makes financial sense when net profit exceeds $50,000–$80,000/year.

Use our S-Corp vs. Sole Prop Tax Calculator to run the numbers.

State LLC Fees and Taxes

While LLCs are disregarded for federal tax, states often charge their own LLC fees:

• California: $800 minimum annual franchise tax + $20 Statement of Information filing fee
• New York: Publication requirement ($300–$2,000 first year) + filing fees
• Texas: No annual franchise tax for LLCs with revenue under $2.47M
• Florida: $138.75 annual report fee
• Delaware: $300 annual franchise tax (popular for incorporation but non-residents also owe home state taxes)

The California $800 minimum franchise tax is particularly notable — it applies even if your LLC earns zero profit. For low-income freelancers in California, this can make an LLC cost-prohibitive.

Real Tax Examples

Example 1 — Freelance Designer in Texas (SMLLC)

Jake lives in Texas, operates as a SMLLC, net profit $55,000. Tax treatment is identical to a sole proprietor:

S-Corp election analysis: With $55,000 profit, S-Corp savings (~$2,000–3,000) may not exceed payroll service and filing costs of $1,500–$2,500. Marginal case for S-Corp.

Example 2 — Consultant in California (SMLLC)

Maria has a California SMLLC earning $95,000 net. She also pays $800 CA franchise tax + $600 in other state LLC fees = $1,400 deductible as business expenses.

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