A client asked me this last week, and I hear a version of it almost every day. People form an LLC, start earning, and wait for the income level that turns taxes on. They picture a threshold: earn under it and you owe nothing, cross it and the tax begins.
That threshold does not exist. The way an LLC gets taxed is simpler than the myth, and knowing it lets you plan instead of guess.
Your LLC does not pay its own income tax
By default, an LLC is a pass-through. The business itself pays no federal income tax. The profit lands on your personal return, and you pay the tax.
If you own the LLC alone, the IRS treats it as a disregarded entity. You report the business on Schedule C with your Form 1040. If you own it with partners, it files a partnership return and hands each owner a K-1.
Either way, the profit is yours to report. That leads to the first thing people get wrong.
You are taxed on profit, not on what you withdraw
I meet owners who left most of their earnings in the business account and assumed that money was not taxable yet. It is. The IRS taxes your net profit for the year, whether you paid yourself or not.
So the number that matters is not your revenue and not your withdrawals. It is your profit: revenue minus legitimate business expenses.
Two different taxes hit that profit
This is where the “how much before I owe” question breaks down. Your profit faces two separate taxes, and they start at different points.
| Tax | Rate | Starts at |
|---|---|---|
| Self-employment (Social Security & Medicare) | 15.3% | $400 of net profit |
| Income tax | Your bracket | After the 2026 standard deduction ($16,100 single) |
Social Security applies to the first $184,500 of net earnings in 2026. Medicare applies to all of it.
You owe self-employment tax at $400 of profit. Four hundred dollars, not forty thousand.
That combination surprises people. You can owe self-employment tax on a modest side income even when your income tax comes out to zero.
The deductions that lower the bill
A few things work in your favor.
- Half your self-employment tax comes off your income on the return.
- The Qualified Business Income deduction, made permanent by the 2025 law, takes up to 20 percent of qualified business profit off your taxable income.
- Every legitimate business expense you track lowers the profit you get taxed on in the first place.
None of these erase the tax. They shrink it, and they reward clean books.
When owners start asking about an S-Corp
Once profit grows, that 15.3 percent self-employment tax becomes the number clients want to cut. That is where an S-Corp election comes in.
An S-Corp lets you split your profit into a reasonable salary and a distribution. You pay payroll tax on the salary. The distribution avoids self-employment tax. That split saves real money when the salary is reasonable and the paperwork is right.
It also adds payroll, a separate return, and rules about what “reasonable” salary means. For some owners the savings clear the cost with room to spare. For others the profit is not high enough yet to justify it. That is a numbers question, and it deserves an actual calculation, not a rule of thumb from a forum.
The real answer
Your LLC owes self-employment tax from about $400 of profit, and income tax depending on your full picture. No income level keeps the business tax-free. The better question is how to structure your income so you keep more of it, and that answer changes with your profit, your goals, and whether you have employees or partners.
If you are forming an LLC, or you already run one and want to stop guessing at tax time, that is the work I do with clients every week. Book a consultation.