What Pass-Through Taxation Means
Pass-through means the LLC’s profit flows to its owners (called members) for tax purposes. The income is taxed once, on the members’ personal returns, with no income tax at the business level.
The IRS sets default LLC classifications based on how many members you have. You can change them by filing an election.
Default Tax Rules by Number of Owners
Single-Member LLC
If you’re the only owner, your LLC is a disregarded entity by default. That means the IRS treats the LLC and you as one for income tax. You report its activity on your federal return, the same way you’d report side hustle income.
For a business run by a single owner, that typically means filing Schedule C with your Form 1040. The LLC still counts as a separate entity for employment taxes and certain excise taxes, which matters once you hire employees.
Multi-Member LLC
With two or more members, your LLC is taxed as a partnership by default. The LLC files Form 1065 but doesn’t pay income tax on its profit.
For a calendar-year LLC, Form 1065 is due by the 15th of March. If the deadline is on a weekend or a holiday, the deadline is the next business day. For example, if the 15th of March falls on a Sunday, returns are due Monday.
Each member then gets a Schedule K-1, a form showing your share of the LLC’s income and deductions. You use your K-1 to report that share on your personal return.
Self-Employment Tax on LLC Profit
Pass-through profit can also trigger self-employment tax, which funds Social Security and Medicare. The self-employment tax rate is 15.3%, and sole proprietors figure their net earnings on Schedule C.
For 2025, the Social Security portion applies to the first $176,100 of earnings. The 2026 cap is $184,500. Here’s how self-employment tax works if you’re new to it.
LLC Tax Classification Options
| Classification | Owners | Default or Election | Key IRS Form | Who Pays Income Tax |
|---|---|---|---|---|
| Disregarded entity | 1 | Default | Schedule C with Form 1040 | You, on your personal return |
| Partnership | 2 or more | Default | Form 1065, plus a K-1 for each member | Members, on their personal returns |
| S corporation | 1 or more | Election | Schedule K-1, Form 1120-S and Form 2553 | Owners, on their personal returns |
| C corporation | 1 or more | Election | Form 1120 and Form 8832 | The LLC itself |
An eligible LLC can elect S corp status with Form 2553 and keep pass-through treatment. Filing Form 8832 to be taxed as a C corp ends pass-through, because the business then pays its own income tax.
The QBI Deduction for Pass-Through Income
The qualified business income (QBI) deduction lets pass-through owners deduct up to 20% of qualified business income from sole proprietorships, partnerships, and S corps. You claim it on Form 8995 or Form 8995-A.
For 2025, you can use the simpler Form 8995 if your taxable income before the deduction is $197,300 or less ($394,600 married filing jointly). For 2026, the taxable income threshold is $201,750 ($403,500 married filing jointly).
The One Big Beautiful Bill Act made the QBI deduction permanent. From 2026, it adds a $400 minimum deduction for eligible owners with at least $1,000 of qualified business income.
Sources
- IRS, Limited Liability Company (LLC)
- IRS, Single Member Limited Liability Companies
- IRS, About Form 2553
- IRS, Self-Employment Tax (Social Security and Medicare Taxes)
- IRS, Instructions for Schedule SE (Form 1040)
- IRS, Instructions for Form 1065
- IRS, Qualified Business Income Deduction
- IRS, Instructions for Form 8995
- IRS, Understanding the Working Families Tax Cuts: Business Tax Provisions
- IRS, Revenue Procedure 2025-32
- SSA, What Is the Current Maximum Amount of Taxable Earnings for Social Security?
