What Is an LLC and What Are Its Tax Advantages? (2026)

LLC tax advantages are one of the most searched small-business questions, and the honest answer surprises people. A limited liability company (LLC) is a business structure created under state law. The "limited liability" is a legal protection, not a tax rule. If an LLC doesn't pick a tax status, the IRS taxes it like a sole proprietor or partnership.

What is an LLC, and how is it taxed by default?

The IRS rules are short. An LLC with one member is treated as an entity disregarded as separate from its owner. If the owner is an individual, the business goes on Schedule C of the owner's Form 1040, just like a sole proprietorship. A domestic LLC with at least two members is classified as a partnership and files Form 1065, with each owner getting a Schedule K-1.

LLC vs sole proprietor taxes: does an LLC save on taxes?

On its own, no. Single-member LLC taxes are the same as a sole proprietor's. Self-employment tax is 15.3% (12.4% Social Security and 2.9% Medicare) on net earnings, which are 92.35% of your profit. For 2026, the Social Security part applies to the first $184,500 of combined wages and self-employment earnings.

Example: $60,000 of profit × 92.35% × 15.3% is about $8,478 of self-employment tax, with or without an LLC.

The real LLC tax advantages

• You can choose your tax status. An LLC can file Form 8832 to be taxed as a corporation, or Form 2553 to be taxed as an S corporation. An eligible entity that files a valid Form 2553 doesn't need a separate Form 8832.
• Pass-through by default. A default LLC generally pays no federal income tax itself. Profit flows to the owners' returns, so it isn't taxed once at the company and again when paid out.
• The qualified business income (QBI) deduction. Owners may deduct up to 20% of qualified business income from sole proprietorships, partnerships and S corps, but not from a C corporation. The 2025 tax law made it permanent. Sole proprietors qualify too, so it's not an LLC-only perk.

LLC taxed as S corp or sole proprietor?

An S corp election can lower employment tax because you pay payroll tax on a reasonable salary, not on all profit. It also adds payroll, a Form 1120-S and a state return. File Form 2553 no more than 2 months and 15 days after the start of the tax year: March 15, 2027 for a January 1, 2027 start, or any time in 2026. Our Form 2553 guide walks through the numbers, and the which-tax-form guide compares every return.

New Jersey and New York LLC fees and taxes

• NJ LLC annual report fee: $75 a year, per the NJ Division of Revenue. If your LLC is taxed as a partnership, has more than two owners and has New Jersey-source income, the NJ-1065 also carries a $150-per-owner filing fee (up to $250,000), due April 15 for calendar-year filers.
• NY LLC filing fee: an LLC with New York-source income files Form IT-204-LL. The fee is $25 for a single-member LLC and $25 to $4,500 for LLCs taxed as partnerships, based on New York-source gross income. It's due the 15th day of the third month after the year ends.
• NYC: LLCs taxed as sole proprietors or partnerships that do business in the city may owe the 4% unincorporated business tax. Filing starts above $95,000 of gross income, and a credit wipes out the tax when it's $3,400 or less.
• S corp in New York: a federal S election doesn't carry over automatically; the company files Form CT-6 to be a New York S corporation.

Merchant Financial Advisory (MFA), an accounting, tax and business solutions provider in Princeton, New Jersey, sets up LLCs and their tax status for individuals and small and mid-sized businesses in New Jersey, New York and nationwide. See our LLC formation service and S corp election service, try the S Corp vs LLC Savings Calculator below, or book a call.