LLC Taxation Explained
An LLC is not a tax category of its own. The IRS taxes it as a disregarded entity if it has one owner, as a partnership if it has two or more, or as a corporation if it elects that. Which of these applies, and whether the owners are US persons or nonresidents, decides which forms you file and who pays the tax.
Key takeaways
- One owner: disregarded entity by default. Two or more owners: partnership by default.
- Any LLC can elect to be taxed as a C corporation with Form 8832, or as an S corporation with Form 2553 if it qualifies.
- S corporation status is not available if any owner is a nonresident alien.
- Foreign-owned single-member LLCs file Form 5472 with a pro forma Form 1120 every year, even with no US tax due.
- State taxes sit on top of federal tax and vary widely. Some states charge an annual LLC tax regardless of profit.
The four ways the IRS can see your LLC
Under the federal "check-the-box" rules, an LLC gets a default classification and can choose a different one. Think of the LLC as the legal container and the tax classification as a label the IRS puts on it.
| Classification | How you get it | Main federal return | Who pays income tax |
|---|---|---|---|
| Disregarded entity | Default for one owner | Owner's return (Schedule C for a US individual); Form 5472 with pro forma 1120 if the owner is foreign | The owner |
| Partnership | Default for two or more owners | Form 1065 plus a Schedule K-1 for each member | The members, on their share |
| C corporation | Election on Form 8832 | Form 1120 | The LLC, at 21%, then owners on dividends |
| S corporation | Election on Form 2553 | Form 1120-S plus K-1s | The owners, on their share |
Disregarded entity: one owner
If you are the only member, the IRS ignores the LLC for income tax and treats its income and expenses as yours. A US citizen reports the business on Schedule C of Form 1040 and pays self-employment tax on the profit.
A nonresident owner is taxed differently. You are only taxed in the US on income effectively connected with a US trade or business, or on certain US-source passive income. Many founders abroad who run a service or software business from home have little or no US income tax, but the LLC still has a reporting duty: the foreign-owned disregarded entity must file Form 5472 attached to a pro forma Form 1120. The IRS penalty for missing it is $25,000.
"Disregarded" applies to income tax only. The LLC is still a separate taxpayer for payroll tax and some excise taxes, and it still needs its own EIN.
Partnership: two or more owners
A multi-member LLC files Form 1065 each year and gives each member a Schedule K-1 showing their share of income, deductions and credits. The partnership itself does not pay federal income tax; the members do.
When any member is foreign and the LLC has effectively connected income, the LLC must withhold under section 1446 on the foreign members' share. The IRS rate is 37% for individual partners and 21% for corporate partners, paid in quarterly instalments and reported on Forms 8804 and 8805. The foreign member then files a US return and claims credit for what was withheld.
This withholding catches many international co-founders off guard. It applies to the share of profit even if no cash was paid out. Our single vs multi-member LLC guide covers the practical impact.
Electing C corporation tax
Filing Form 8832 lets an LLC be taxed as a C corporation while staying an LLC under state law. The LLC then pays federal corporate tax at a flat 21% on its profit and files Form 1120. Profits paid out to owners as dividends are taxed again in their hands; for a foreign owner, US dividends are generally subject to 30% withholding unless a tax treaty reduces the rate.
Founders choose this when they plan to reinvest most profit, want a structure that some home countries understand better than a transparent LLC, or are preparing to raise money. A foreign-owned corporation still files Form 5472 if it has reportable transactions with related parties.
Electing S corporation tax
An S corporation passes income through to owners like a partnership but lets working owners split profit into salary and distributions. Only salary carries payroll tax, which is why US-based owners with steady profit consider it.
The rules are strict. The IRS requires a domestic entity, no more than 100 shareholders, one class of stock, and only allowable shareholders: individuals, certain trusts and estates. Partnerships, corporations and nonresident aliens cannot be shareholders. For most readers outside the US, this route is simply closed. The LLC vs S-Corp comparison goes into the salary rules for those who do qualify.
Self-employment tax
US citizens and residents who own a disregarded or partnership LLC pay self-employment tax of 15.3% on most net earnings: 12.4% for Social Security up to the annual wage base ($184,500 for 2026) and 2.9% for Medicare with no cap. The IRS does not apply self-employment tax to nonresident aliens unless a Social Security totalization agreement says otherwise. Details are in our self-employment tax guide.
State taxes
Federal classification usually carries through to the state, but each state adds its own layer:
- Flat annual fees or taxes. California's annual LLC tax is $800. Delaware charges an annual LLC tax due June 1. Wyoming's annual report license tax starts at $60.
- Income-based taxes. Some states tax LLC income or gross receipts once you have enough activity there, even if you formed elsewhere.
- Sales tax. Selling physical products into a state can trigger sales tax registration based on that state's thresholds.
Forming in a no-income-tax state does not shield you from the taxes of the state where you actually do business. If you open an office or warehouse elsewhere, that state's rules apply too.
How to choose a classification
- Start with who the owners are. If anyone is a nonresident alien, S corporation status is out.
- Look at what happens to profit. If you will take most of it out, pass-through treatment avoids a second layer of tax. If you will keep it in the business, corporate tax may be simpler.
- Check your home country. Some countries tax a transparent US LLC's profit as it is earned; others treat it as a company. A mismatch can cause double tax.
- Consider fundraising. Most venture investors want a C corporation, not an LLC taxed as one.
- Count the compliance. A partnership with foreign members has withholding, K-1s and more forms than a single-member LLC.
Common mistakes
- Filing nothing because "the LLC made no money". Form 5472 and Form 1065 obligations do not depend on profit.
- Electing S corporation status with a foreign co-owner. The election is invalid and can be terminated.
- Missing the election window. Form 2553 generally must be filed no later than 2 months and 15 days after the start of the tax year it is to take effect.
- Assuming the state follows the federal label. A few states tax LLCs directly regardless of federal status.
This is general information, not tax advice. A CPA should confirm the best classification for your facts.
Federal tax rates worth knowing
Three federal rates come up again and again for LLC owners. Which one applies depends on how your LLC is classified and whether you are a US person. This is general information, not tax advice.
| Rate | Percent |
|---|---|
| Self-employment tax on net earnings (US persons) | 15.3% |
| Corporate income tax (LLC taxed as a C-Corp) | 21% |
| Default withholding on US-source FDAP income to foreign persons | 30% |
Frequently asked questions
Can I change my LLC's tax classification later?
Yes. You can file Form 8832 to change classification, but after an election you generally cannot change again for 60 months unless an exception applies. A change can also trigger tax on built-in gains, so plan it with a CPA.
Does a disregarded LLC need its own EIN?
A US-owned single-member LLC with no employees can sometimes use the owner's number, but in practice banks and platforms ask for an EIN. A foreign-owned single-member LLC needs one to file Form 5472.
Is LLC income taxed twice?
Only if you elect C corporation treatment. Disregarded and partnership LLCs are taxed once, at the owner level. Your home country may tax the same income, which is a separate issue handled by treaties and foreign tax credits.
Do nonresident owners pay self-employment tax?
Generally no. The IRS exempts nonresident aliens unless a totalization agreement imposes US coverage. Once you become a US resident for tax purposes, the normal rules apply.
Which return is due first each year?
For a calendar year LLC, partnership returns (Form 1065) are due March 15. Corporate returns, including the pro forma Form 1120 with Form 5472, are due April 15. Extensions are available for both.
Want a filing plan built around your owners and home country? Our tax preparation and planning service sets up the right classification and calendar from the start.
