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Pass-through taxation is when a business entity (like a Limited Liability Company) doesn’t pay taxes on business profits directly to the IRS.
Instead, the tax-paying responsibility “passes through” the business to the owners.
Pass-through taxation is one reason people choose to form LLCs. An LLC is a pass-through business entity and it avoids double taxation.
Tip: It may be easier to think of pass-through taxation as “flow-through” taxation. Meaning, the tax-paying responsibility “flows through” to the LLC owner(s).
What types of LLCs have pass-through taxation?
LLCs that are treated as Pass-through Entities include:
- LLC taxed as a Sole Proprietorship
- LLC taxed as a Partnership
- LLC taxed as an S-Corporation
- LLC taxed as a Qualified Joint Venture (in community property states)
Only one type of LLC is not treated as a Pass-through Entity: an LLC taxed as a C-Corporation.
In this case, the LLC pays corporate taxes on the LLC’s profits. And the owners pay personal income tax on their dividends using their personal tax returns. This is referred to as “double taxation”.
Does my LLC have pass-through taxation?
| Tax classification | Pass-through taxation? |
|---|---|
| LLC taxed as Sole Proprietorship | Yes, taxes flow through to the owner |
| LLC taxed as Partnership | Yes, taxes flow through to the owners |
| LLC taxed as S-Corp | Yes, taxes flow through to the owner(s) |
| LLC taxed as C-Corp | No, the LLC pays corporate income tax |
What are the benefits of pass-through taxation?
The benefit of pass-through taxation is avoiding double taxation.
Double taxation is when profits are taxed twice (once at the entity-level and again at the personal level).
In contrast, pass-through entities are only taxed once – at the personal level.
LLC Pass-through Taxation FAQs
What’s the LLC pass-through tax rate?
For pass-through entities, the amount of tax you pay doesn’t change. It’s the same amount as if you were operating without an LLC.
Meaning, the business income from your LLC “flows through” to your personal tax return (Form 1040). And then your income tax is based on the graduated rates set by the IRS, plus any flat-rate taxes like self-employment tax.
Check your personal income tax rate here: IRS Income Tax Rates for 2024.
Note: An LLC taxed as a C-Corporation pays entity-level taxes at the corporate tax rate. And the owners also pay personal income tax at their personal income tax rate. You can determine your corporate tax rate here: IRS: Publication 542.
What do I need to do to get pass-through taxation?
You don’t need to do anything special for your LLC to be treated as a pass-through entity. This is the default tax classification for all Single-Member LLCs and Multi-Member LLCs.
An LLC is assigned this default tax classification by the IRS when you apply for your EIN.
Does having an LLC help with taxes?
No, having an LLC doesn’t help you save money on business income taxes.
(The main reason people form an LLC is for personal asset protection, not tax liability purposes.)
With LLCs taxed in their default status, you pay the same amount of taxes as you would operating a business without an LLC.
Said another way, an LLC pays the same amount of taxes as if you were operating as a Sole Proprietorship (or General Partnership).
Exception (choose an elective status):
For businesses with established revenue, requesting your LLC be taxed as an S-Corporation can save money on self-employment tax.
However, it costs money to run an S-Corporation, so we recommend looking into this once your business is making about $70,000 net income annually, per Member. See LLC Taxed as S-Corp for more information.
When does it make sense for my LLC to be taxed as a C-Corporation?
This is not a common election and we don’t recommend this for most people.
However, if your LLC has lots of employees, then electing C-Corporation tax treatment can save your business money on health care fringe benefits.
If you are considering an LLC taxed as a C-Corporation, we recommend speaking with an accountant.
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
Hi Matt,
We have an LLC and me and my husband are partners.we bought a land in FL on that LLC name.But we didn’t do any activity since then.Its a bare land.(bought it 2024). We have EIN for that LLC. Do we still need to file Taxes?Please clarify.Thank you.
Hi Priya, because you have an LLC taxed as a Partnership, you’ll need to file a 1065 Partnership Return. This doesn’t mean taxes will be owed (it sounds like not), but the return is an informational return and must be filed every year. Hope that helps.
Thank you Matt.We didn’t file anything so far.Is that fine If we do it now?Do we need to pay any penalty?
Hi Priya, yes, there is a penalty for late filing a 1065 Partnership Return. As per the IRS (see IRS: Failure to file penalty), it’s currently $245 per month (per Member). Having said that, you can request a penalty abatement if you have reasonable cause (see IRS: Penalty relief for reasonable cause). I recommend reaching out to an accountant for help filing. Hope that helps.
Hi Matt,
Say I am a foreigner non US citizen/resident with a sole proprietor LLC set up to receive payments from clients in the US while I live abroad. I have heard that because I am not engaged in business in the US nor have employees or a physical location income from my services are not taxable by the IRS but by my country of residence.
Can you please clarify if this is so? Thanks!
Hi Omar, taxes for non-US residents with LLCs can be complicated, but generally, if you don’t live in the US, have employees in the US, or have a physical store/office there, then no, you usually don’t owe US income taxes. Instead, you’d pay taxes in your home country. That said, even if you don’t owe US taxes, you still have to file Form 5472 and Form 1120 with the IRS. These forms don’t mean you owe taxes, but they’re required for reporting purposes. Because non-US resident taxes can be complicated, it’s best to speak with an accountant who specializes in non-US resident taxes. Hope that helps.
Excellent. Sounds about right based on what I’ve been able to investigate.
Thanks for confirming Matt!
Sure thing Omar 🙌. You’re welcome.
Hi, with an LLC single owner, what is the annual cap on amount that ca passthrough? Thank you
Hi Ana, the good news is that with a Single-Member LLC, there is no annual cap or limit on the amount that can passthrough to your personal 1040 tax return.
A Single-Member LLC is taxed like a Sole Proprietorship by default. This means that all of the LLC’s profits pass through directly to your personal tax return (Form 1040), and you’ll pay taxes on the LLC’s profits based on your personal income tax rate.
Said another way, no matter how much your LLC earns, all of the profits pass through to you, and you’ll report and pay taxes on all of the LLC income on your personal tax return. Hope that helps!
Hi Matt,
My daughter is a 1st year college student and she wants to start a LLC for a transport brokerage business. The LLC will be based in FL. How much tax is she looking at if she earns E.G. $4000 a month gross and $885.87 net? Thank you so much.
Hi Ray, awesome to hear about her entrepreneurial spirit! If she is a Florida resident, there are no state income taxes. And for federal taxes with the IRS, typically, her profit will be taxed based on her tax bracket (see IRS: Federal income tax rates and brackets). Hope that helps.
If I have a LLC taxed as S-corp.
The LLC member is a S-corp.
What do I (pass thru) to the member S corp. for its books? a k-1?
Thanks
I’m not asking for the legal advise, just idea where/how
Hi Mark (in the eyes of the IRS), when an S-Corp owns and S-Corp this is called a Qualified Subchapter S Subsidiary (QSSS). We’re not a tax firm, so can’t answer how you should complete your returns. We recommend speaking to an accountant or two.
We have a pass-through LLC established in MAssachusetts in 2014. It is based out of our house. We have expanded to a store-front location. We have 2 managers and our net income from the LLC is <$50,000.00 per year. Should we consider changing the tax status type to an S-corp? How difficult is that? Massachusetts is one of the states that allow conversion.
Hi Mark, the “conversion” would actually take place at the federal level with the IRS. In this situation, I personally wouldn’t do it. Setting up and maintaining an LLC/S-Corp is a lot of work. And can be stressful and cause headaches. Furthermore, I personally don’t recommend looking into it until there is at least $70,000 of net income per LLC Member. Hope that helps.