LLC Tax Navigator

Owner Compensation & Liability Report

LLC Taxation Fundamentals

Understanding how limited liability companies (LLCs) handle taxes is critical for owner compensation. By default, the IRS treats an LLC as a "pass-through" entity. This means the business itself pays no income tax. Instead, profits flow directly to the owners' personal tax returns.

Schedule C

Used by Single-Member LLCs. Your business income and expenses are reported here, attached to your personal Form 1040. The "Net Profit" is what you are taxed on.

Form 1065 & K-1

Used by Multi-Member LLCs. The partnership files Form 1065 (informational). Each partner receives a Schedule K-1 outlining their share of the profit/loss.

Pass-Through Taxation

The entity acts as a funnel. If the business earns $100k, that $100k lands on the owners' tax returns, regardless of whether they actually withdrew the cash from the bank account.

Critical Distinction: Profit vs. Distribution

Many new owners make the mistake of thinking they only pay taxes on the money they transfer to their personal checking account (distributions). This is false. You pay taxes on the allocated profit of the business, even if you leave the money in the business bank account for future growth.

Self-Employment Tax Engine

Unlike employees who have taxes withheld, LLC owners must pay both the employer and employee portions of Social Security and Medicare taxes. This is collectively known as the Self-Employment (SE) Tax.

Liability Estimator

$

Enter your annual net profit (Revenue - Expenses).

Social Security (12.4%) $0
Medicare (2.9%) $0
Total SE Tax $0

*Estimates based on 92.35% taxable base calculation rule.

Where does the 15.3% go?

Breakdown of Self-Employment Tax Components

Income Tax is Separate

The calculator above ONLY shows SE Tax. You still owe standard Federal and State income taxes on top of this.

The Deduction Offset

You can deduct 50% of your SE Tax from your gross income on your Form 1040, slightly reducing the pain.

Guaranteed Payments vs. Distributions

How do owners actually get cash out of the business? In a multi-member LLC, the distinction between a "Guaranteed Payment" and a "Distributive Share" changes the tax classification.

Distributive Share

This is the partner's share of the profit. It is allocated based on the Operating Agreement (often % ownership).

  • Not Salary: No taxes withheld.
  • Tax Timing: Taxed when profit is earned, not when cash is taken.
  • SE Tax Impact: For active General Partners, this entire amount is subject to SE Tax (15.3%).
The Flow
LLC Net Profit: $100k
50% Partner Allocation
Taxable Income: $50k
(Subject to Income Tax + SE Tax)

Guaranteed Payments

Payments made to a partner for services or capital, made without regard to the income of the partnership. Essentially, a "salary" for a partner.

  • Expense: The LLC deducts this payment as a business expense.
  • Tax Treatment: The recipient treats it as Ordinary Income + subject to SE Tax.
  • Usage: Often used to compensate partners who work more hours than others.
The Flow
Service Agreement: $5k/month
LLC Deducts $60k/yr
Partner Income: $60k
(100% Subject to SE Tax)

The S-Corp Election Strategy

High-earning LLCs often elect to be taxed as an S-Corporation to save on Self-Employment taxes. In an S-Corp, you split income into "Reasonable Salary" (taxed) and "Distributions" (not subject to SE Tax).

$30k $100,000 $250k
Estimated Savings $0 vs. Standard LLC

1. Reasonable Salary

You MUST pay yourself a fair market salary. If you pay $0 salary to avoid taxes, the IRS will audit and reclassify distributions.

2. Payroll Costs

S-Corps require running formal payroll. This costs money ($500-$1000/yr) and adds administrative complexity.

3. The Sweet Spot

Usually, the tax savings outweigh the admin costs once net profit exceeds $60k-$80k per year.