LLC owners expecting a quick answer to how much they owe in taxes are always disappointed by a series of “well it depends” answers. Frankly I got sick of all that, so I made a 2020 federal tax rate table based on common sense deductions. Here’s what I’ve found:
Effective tax rates for LLC owner income, at the federal level, range from 14% to 39%.
Most LLCs are pass-through entities, meaning the income is reported on your personal tax return. So your personal situation determines how your LLC income is taxed. First let’s dive into the findings in detail and explore the major factors that can affect your tax rate most.
LLC Owner Tax Rates
| Income | Effective Tax Rate |
|---|---|
| $15,000 | 14% |
| $30,000 | 18% |
| $60,000 | 20% |
| $100,000 | 23% |
| $150,000 | 25% |
| $500,000 | 33% |
| $1,000,000 | 36% |
| $10,000,000 | 39% |
Above we have a 2020 LLC member’s income passing through to a single filer, that is only earning self employment income. We've applied the deductions for self employment, full 20% QBI (when possible), as well as the standard deduction. Others deductions may apply to your situation. Your actual tax rates will likely differ, please refer to your tax professional or CPA for your real effective tax rate.
To get your personalized effective tax rate, which includes all your state taxes, please try our LLC Tax Calculator.
Not for Corporate Taxes
While you can elect to have your LLC taxed as C-Corp, it's an uncommon strategy for most entrepreneurs. Because of the substantial tax differences of C-Corps we'll ignore that specialized case for this guide.
How Much Income Are You Earning?
First concern that affects your tax rate is how much earned income there is. Earned income is what the majority of self employed people receive from their business. This is a key factor because your earned income is subject to 2 large and progressive taxes: self employment and income taxes. In the table above all the income is “earned income”, which as you look down the rows gains a progressively higher tax rate.
IRS on Earned Income
"Wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment." You can read the full definition here.
Larger amounts of earned income are exposed to progressively higher Medicare and Income Tax rates. This is a huge tax factor for high wage earners.
While the table above is only dealing with self employment income, you’ll need to factor in all kinds of earned income. For example if you have W-2 job income, or other LLC income, those amounts will be combined when deciding your income tax bracket. Passive income from investments like dividends will not be included in your earned income.
Is Your LLC an S-Corp?
An S what you say!? Please don’t get discouraged by the funny name: it just means you can ask the IRS to tax your LLC differently than you are now. S Corps can seriously help you to avoid the pain of one of the major tax groups: self employment (15.3%).
The primary benefit of S Corps is they allow you to be compensated without as much earned income. If there’s one thing I want you to take away from this post it’s this: the more earned income you have the higher your effective tax rate is going to be. As tax strategists it’s our goal to find ways to replace your earned income, which an S Corp can help you with.
While S Corps are wonderful for some LLCs, they do have some drawbacks you should research. If you’re curious about how an S Corp could reduce your tax rate, please try our S Corp tax calculator. Simply select your state, input some details, and you’ll be able to compare an S Corp tax savings against your current LLC.
Can You Claim The QBI Deduction?
Pass-through entities like LLCs were given a substantial benefit in the Tax Cuts and Jobs Act of 2017 known as the "QBI deduction". It allows LLC owners to deduct a maximum of 20% of their business’s income.
What's QBI
The QBI or "qualified business income" deduction allows owners of eligible pass through entities, like LLCs, to deduct up to 20% of their eligible business income on their taxes.
Before you get too excited know that not all LLC income qualifies fully or even partially for this deduction. For higher incomes you’ll want to avoid meeting the IRS definition of a “specified service trade or business” (SSTB). That can reduce or even wipe out this deduction completely. Be sure to speak with CPA to make sure you can claim this amazing deduction!
Final note on QBI: it's a "below the line" deduction, meaning it will not help you reduce expensive self employment taxes on your earned income. It will however help to reduce your income taxes. To reduce self employment taxes please read the section on S Corps above.
Were You A Shareholder In The LLC?
Shareholders or "Limited Partners" of your LLC will have a lower effective tax rate than active members. The table above shows the tax rates for an active member, while a passive shareholder would have tax rates more in line with the following capital gains brackets (listed below).
Odds are you're an active member of your LLC receiving the dreaded "earned income". Yes that's right, another rant about earned income! Passive shareholders will only pay capital gains tax and Net Investment Income tax because they earned passive income, not earned. Therefore passive members are given much better tax treatment than active members.
Long Term Capital Gains Tax Rates (2020)
| Filing Status | Income | Rate |
|---|---|---|
| Single | $0 - $40,000 | 0% |
| Single | $40,001 - $441,450 | 15% |
| Single | > $441,450 | 20% |
| Married (filing jointly) | $0 - $80,000 | 0% |
| Married (filing jointly) | $80,001 - $496,600 | 15% |
| Married (filing jointly) | > $496,600 | 20% |
| Married (filing separately) | $0 - $40,000 | 0% |
| Married (filing separately) | $40,001 - $248,300 | 15% |
| Married (filing separately) | > $248,300 | 20% |
| Head of household | $0 - $53,600 | 0% |
| Head of household | $53,601 - $469,050 | 15% |
| Head of household | > $469,050 | 20% |
What’s Your State’s Income Tax?
Most states have an income tax that will apply to your LLC earnings, possibly highly increasing the effective tax rates discussed so far. The table above shows a taxpayer living in a state without an income tax on salaries or wages. These 9 states include: Alaska, Texas, Florida, Nevada, Tennessee, South Dakota, New Hampshire, Washington, and Wyoming.
To get your state’s income tax rate try NerdWallet's helpful list of state income taxes. Make note if you live in a state with a flat or progressive income tax rate. Once you have that percentage apply it to the table above, which will over estimate your tax rate. The reasons for this overestimation are technical, but that's okay because you're usually better off overestimating your tax liability anyway.
States That Tax LLCs
In addition to income taxes, some states tax LLCs directly like California (who charges an $800 franchise tax). While this isn't typically a major factor for your effective tax rate, it's a good idea to plan ahead for it.
Next Steps
It’s probably obvious by now that the table of tax rates above drew a lot of blanks about your personal tax situation. These areas include: other income sources, qualified business income, LLC membership type, state taxes, and a lot of other deductions we haven’t even discussed. Those are a lot of factors that need to be included before we get an accurate idea of your real tax rate!
It’s best to use the table above as a starting point for your real tax rate. Fill in what you know and try to overestimate when possible so you can more effectively set aside money for taxes. Lastly, speak with your CPA about the topics we covered in this article. These are major areas you can explore to improve your LLC’s effective tax rate.
Finally please try our LLC Tax Calculator to get your personalized tax report. You'll learn about all your state and federal taxes, get an effective tax rate, and discover major tax savings available to you.
