Small Business · LLC Taxes

LLC Tax Basics for Small Business Owners

May 2026·10 min read·Educational only

Forming an LLC is one of the most common steps new business owners take — but many are surprised to learn that an LLC is not a tax classification. The IRS treats an LLC differently depending on how many owners it has and what elections you make.

Key concept: A single-member LLC is a "disregarded entity" by default — the IRS sees right through it and taxes the owner directly as a sole proprietor. The LLC structure affects liability, not necessarily taxes.

How Single-Member LLCs Are Taxed

By default, a single-member LLC files Schedule C as part of the owner's personal tax return. Net profit is subject to:

Self-employment tax — 15.3% on the first $184,500 (2026), then 2.9%
Federal income tax — at your marginal bracket
State income tax — varies by state

The QBI Deduction for LLC Owners

Section 199A allows most LLC owners to deduct up to 20% of qualified business income from their taxable income. On $150,000 of net business income, that's a potential $30,000 deduction — worth approximately $6,600 in tax savings at the 22% rate.

The deduction phases out for higher-income business owners in certain "specified service" industries (law, finance, consulting) and has wage/property limitations above the phase-out threshold.

S-Corp Election: When It May Make Sense

An LLC can elect S-Corporation tax treatment. This allows the owner to split income between a "reasonable salary" (subject to payroll taxes) and a "distribution" (not subject to self-employment tax). For profitable businesses, this may reduce the SE tax burden.

However, S-corps come with additional costs: payroll administration, a mandatory "reasonable salary," quarterly payroll filings, and potentially state-level franchise taxes. The math only works at a certain income level.

Key Business Deductions

Home office (dedicated space only)
Business equipment and technology
Vehicle use for business (actual expenses or standard mileage)
Health insurance premiums (self-employed deduction)
Retirement contributions (SEP IRA, Solo 401k)
Professional fees (accounting, legal, software)
Bonus depreciation — 100% in year one under OBBBA 2026

Important: LLC taxation is highly situation-dependent. The QBI deduction has complex rules, S-corp elections have strict requirements, and deduction eligibility depends on your specific business activities. Always work with a qualified tax professional for entity structure decisions.

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For educational purposes only. LLC taxation, S-corp elections, and business deductions involve complex rules. This article does not constitute tax, legal, or financial advice. Consult a qualified tax professional or attorney before making any entity structure decisions.