How is a single-member LLC taxed?

A single-member LLC is, by default, a disregarded entity for tax purposes, meaning the business itself files no separate income tax return and its profit is reported on the owner's personal return. All of that profit is subject to self-employment tax. The owner can later elect S-corporation treatment, which changes how earnings are split and taxed, once profit justifies it.

Key points

A single-member LLC is by default a disregarded entity, so it files no separate federal income tax return.
A disregarded LLC's income and expenses go on Schedule C of the owner's Form 1040, and profit is taxed whether or not it is withdrawn.
All net profit of a disregarded single-member LLC is subject to self-employment tax, which the owner computes on Schedule SE.
A single-member LLC can elect S-corporation treatment on Form 2553, after which only the owner's reasonable salary carries employment tax.
The LLC needs its own bank account and books to preserve liability protection, and its own EIN if it has employees.

What does disregarded entity mean for a single-member LLC?

A single-member LLC offers real legal protection while, for federal tax purposes, being treated as though it barely exists. As a legal entity, the LLC shields your personal assets from business claims. For federal income tax, by default, the LLC is a disregarded entity, which means the tax system looks straight through it to you.

The LLC does not file its own income tax return. Its income and expenses are reported on Schedule C attached to your Form 1040, as if you operated the business directly. The profit the business earns is your income for the year whether or not you move the money out of the business account. You are taxed on the profit, not on what you withdraw.

How does self-employment tax apply to LLC profit?

Because you are treated as self-employed, all of the net profit of the business is subject to self-employment tax, which funds Social Security and Medicare, on top of regular income tax. An employee splits this cost with an employer; a self-employed owner carries both halves and computes the tax on Schedule SE.

On a profitable single-member LLC this is frequently the largest tax the owner pays, and it applies to the entire profit, not just the portion taken as pay. Half of the self-employment tax is deductible in arriving at adjusted gross income, and the owner generally must pay quarterly estimated taxes to cover both income tax and self-employment tax.

When should a single-member LLC elect S-corporation treatment?

A single-member LLC can elect to be taxed as an S-corporation by filing Form 2553. Once it does, the owner is paid a reasonable salary through payroll, and only that salary carries employment tax. The remaining profit can be taken as a distribution, which is not subject to self-employment tax.

The election brings payroll, a separate return on Form 1120-S, and the obligation to set and defend a reasonable salary. Those costs mean the election pays only once profit is high enough that the savings on the distribution portion outrun the added administration. Below that level, the default treatment is simpler and often cheaper overall. The usual path is to operate as a disregarded LLC while profit is modest, then elect when the numbers cross.

What does disregarded status not cover?

Disregarded status applies to federal income tax and does not erase the LLC for other purposes. The LLC generally needs its own employer identification number if it has employees or if it makes the S-corporation election, and most banks require one to open a business account. It should keep its own bank account and books, because mixing personal and business funds is the most common way owners lose the liability protection the LLC was formed to provide.

States can treat the LLC differently. Some impose an annual franchise tax, an LLC fee, or a separate filing regardless of federal disregarded status, so your home state's rules matter. And disregarded status does not apply to employment taxes: if the LLC has employees, it files payroll returns under its own EIN as the employer.