Self-Employment LLC Taxes Guide

Updated: 2/22/24

When you start your limited liability company (LLC), one of the things you might not be anticipating is LLC self-employment taxes. But they’re an unavoidable part of running a business. To pay these taxes compliantly, you’ll need to know what these taxes are, how much they’ll cost you, how to file them, and more. We’ll cover all the essentials of LLC self-employment tax in this guide.

Do LLCs pay self-employment taxes?

LLCs themselves don’t pay self-employment taxes; their members do. That’s because for federal income tax purposes, an LLC is not a taxable entity unless it opts to be taxed as a C corporation. It’s indistinguishable from its members, and so the tax burden passes through to the members. Each member reports this LLC income on their personal tax return and pays accordingly. 

That tax burden includes both general income taxes and self-employment taxes.

What are self-employment taxes?

“Self-employment tax” is an umbrella term for two taxes governed by the Federal Insurance Contributions Act (FICA): Social Security and Medicare. In a traditional employment setting, these taxes are withheld from a person’s paycheck. The employer pays half of them, and the employee pays the other half. But when an individual works for themselves as an active participant in their LLC, they have to pay the taxes on their own.

Currently, the Tier 1 rate for Social Security tax is 12.4%. Medicare taxes are currently 2.9%, making a combined rate of 15.3%. Tier 1 applies to any income up to $147,000. For any income that falls into Tier 2, you won’t pay Social Security taxes. You will pay Medicare taxes at a 3.8% rate, though. 

On the plus side, LLC members can deduct half of their paid self-employment taxes as a business expense. Most can also deduct 20% of their qualified business income from their total taxable income.

Single-Member LLC Tax Rates

Single-member LLCs pay the same self-employment taxes as multi-member LLCs. But as the sole owner, they’ll be taxed on 100% of the business’s taxable gain. And that includes self-employment taxes. 

These tax rates always apply unless the single-member LLC opts to be taxed like a C corporation or S corporation.

Why does an LLC pay self-employment tax?

An LLC’s members pay self-employment taxes because they’re not employed by the LLC. And since they’re not employed, no employment taxes are being withheld from their paychecks. In a typical employment setting, an employer withholds employment taxes from their employees’ paychecks. But the employee actually only pays half of the employment taxes; the employer pays the other half. 

Since the LLC’s owners are working for themselves, they have to pay both the employer and employee share of the tax. 

How do LLCs pay self-employment taxes?

There are two primary steps to paying self-employment (SE) taxes: calculating how much you owe and actually paying them. To calculate your SE taxes, the IRS recommends using the worksheet on Form 1040-ES (Estimated Tax for Individuals) to figure out how much tax you owe. You can use this form for both income taxes and self-employment taxes.

Once you’ve determined how much tax is due, you can pay your estimated tax. Making quarterly estimated tax payments is the best practice to avoid late fees or underpayment fees. You can make these payments using an IRS-approved website or sending in a check or money order with the payment voucher attached to the form. 

Can filing as an S corporation reduce self-employment taxes?

A traditional LLC and an LLC electing S corporation status both have pass-through taxation. However, for some LLCs, electing this tax status can reduce the self-employment tax burden for the members. We’ll explain below.

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay half of them.

When the members elect S corp status, though, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. (Of course, LLC members still must pay income and other applicable taxes on their profits.) This can add up to quite a lot for certain profitable LLCs. 

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. The IRS generally considers “reasonable” to be something similar to what others in your field are earning for the same work.

Exceptions to Self-Employment Taxes for LLCs

In addition to S corps, there are notable exceptions and strategies that can affect the self-employment tax obligations of LLC members.

Real Estate Rental Activity

Generally, real estate rental income is not considered earned income from self-employment and thus not subject to self-employment taxes. However, this can vary if the LLC owner is a real estate professional or the LLC provides significant services along with the rentals or if the rentals are short-term, which may reclassify the income as subject to self-employment taxes.

Limited Partners in an LLC

For LLCs that are structured to include limited partners (members who are not actively involved in the business operations), the limited partners’ share of income might not be subject to self-employment taxes. This exception is based on the principle that limited partners are investors rather than active participants in the business. However, the applicability of this exception can be complex and depends on the specific roles and activities of the members within the LLC.

Retirement and Disability

Income distributed to members of an LLC from retirement or disability plans may also be exempt from self-employment taxes. These distributions are considered investment income rather than active business income, aligning with the broader tax treatment of such income streams.

Health Insurance Premiums

Although not an exception to self-employment taxes per se, LLC members can deduct 100% of their health insurance premiums for themselves, their spouses, and their dependents directly on their Form 1040, which can effectively reduce their taxable income and, by extension, their self-employment tax liability.

We can help!

Starting and managing an LLC is an important legal process, but it doesn’t have to feel insurmountable. At ZenBusiness, we strive to be an entrepreneur’s best teammate by providing you with the tools you need to succeed. Whether you need tax tips, want help forming an LLC, managing your LLC’s finances, or staying compliant, we’ve got your back.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.