Do I pay taxes on LLC profits even if I don’t withdraw the money?

Yes. You are taxed on the profits your LLC earns, not on the money you actually withdraw. Even if you leave the profits in the business, they are still taxable to you personally.

What’s the tax difference between an LLC and an S Corporation?

An LLC taxed as an S Corporation pays its owner a salary, which is subject to payroll taxes. Additional profits can be taken as distributions, which are not subject to self-employment tax-potentially lowering overall tax liability.

Can an LLC be taxed as a C Corporation?

Yes, an LLC can elect to be taxed as a C Corporation. In that case, the business pays corporate income tax on profits, and owners are taxed again on dividends, resulting in double taxation.

Are LLC distributions taxable income?

No, distributions themselves are not taxable. The profits of the LLC are taxed when earned, not when distributed. Distributions are simply a way to transfer already-taxed earnings to the owner.

How Are LLC Profits Taxed?

Q: How are LLC profits taxed?

LLC profits are usually taxed as pass-through income, meaning the profits are reported on the owner's personal tax return and taxed accordingly. The specific treatment depends on how the LLC is classified for tax purposes.

LLC profits are taxed based on how the LLC is classified for federal tax purposes-not on how or when money is distributed to owners.

The way your LLC is taxed depends not just on its structure but also on how you’ve chosen to have it treated by the IRS. This flexibility is one of the advantages of forming an LLC-but it can also cause confusion, especially when it comes to profits and taxes. Understanding how profits are taxed is key to avoiding surprises and planning your finances properly.

Contents

1. LLCs Are Pass-Through Entities by Default
2. Single-Member LLC (Taxed as Sole Proprietor)
3. Multi-Member LLC (Taxed as Partnership)
4. LLC Electing S Corporation Status
5. LLC Electing C Corporation Status
6. Distributions Are Not What’s Taxed-Profits Are

1. LLCs Are Pass-Through Entities by Default

By default, the IRS treats LLCs as pass-through entities. This means the LLC itself does not pay federal income tax. Instead, the profits “pass through” to the owners, who report the income on their personal tax returns.

This applies to both single-member and multi-member LLCs, but the specific filing requirements differ.

2. Single-Member LLC (Taxed as Sole Proprietor)

If you’re the only owner of your LLC, the IRS ignores the LLC for tax purposes and treats you as a sole proprietor. You report business income and expenses on Schedule C, which is filed with your Form 1040.

You pay income tax on the LLC’s net profit
You also pay self-employment tax (15.3%) on the profit
You owe these taxes even if you leave the money in the LLC’s bank account and don’t pay yourself

Example: If your LLC earns $60,000 in net profit, you’ll report that on your personal tax return and pay income and self-employment tax on the full amount-regardless of how much you actually withdraw.

3. Multi-Member LLC (Taxed as Partnership)

If your LLC has more than one owner, it is taxed as a partnership by default. The LLC files Form 1065 and issues a Schedule K-1 to each member, showing their share of the profit or loss.

Each member reports their share of profit on their personal tax return
Self-employment tax also applies to each member’s portion of profit
Distributions are not taxed when received-they’re taxed when earned

This structure still follows the pass-through model: the LLC itself doesn’t pay income tax, but members do.

4. LLC Electing S Corporation Status

LLCs can choose to be taxed as an S Corporation by filing Form 2553. This does not change the LLC’s legal structure, but it alters how profits are taxed.

Owner-employees must be paid a reasonable salary, subject to payroll taxes
Any remaining profit can be distributed as S Corp dividends, which are not subject to self-employment tax

This structure can provide tax savings, especially for LLCs with consistent profits, but it requires more complex accounting and compliance with payroll rules.

Example: If your LLC earns $100,000 in profit and you pay yourself a $60,000 salary, the remaining $40,000 can be taken as distributions not subject to self-employment tax. But the $60,000 salary is taxed like regular wages.

5. LLC Electing C Corporation Status

LLCs can also elect to be taxed as a C Corporation by filing Form 8832. This is uncommon for small businesses but may offer strategic advantages in certain scenarios.

The LLC pays corporate income tax on its profits (currently 21%)
If profits are distributed as dividends to owners, those dividends are taxed again on the owners’ personal tax returns-this is called double taxation
Owners who work in the business can receive salaries, which are deductible by the business and taxed like normal income

This structure can be useful for businesses planning to raise capital or retain earnings within the company.

6. Distributions Are Not What’s Taxed-Profits Are

One of the most common misconceptions about LLC taxation is the idea that taxes apply only when you “pay yourself.” In reality, you’re taxed based on what the LLC earns, not on what you take out.

That means:

You could owe tax on income you haven’t withdrawn
You could withdraw funds that aren’t taxable if they were already taxed in a prior year

This is why good bookkeeping is critical. Knowing your real profits helps you anticipate your tax bill-even if you haven’t moved a dollar from the business account.

LLC profits are taxed based on your federal tax classification-not your payout behavior. Whether you’re a sole member, in a partnership, or elected S Corp status, your profits will likely pass through to your personal return. Understanding how profits are taxed helps you plan for tax time, avoid surprise bills, and structure your compensation wisely.