Federal tax treatment: the disregarded entity default

For federal income tax purposes, a single-member LLC is treated as a disregarded entity by default. This means the IRS does not recognize the LLC as a separate taxable entity. Instead, the business income and expenses flow directly to the owner's personal tax return, reported on Schedule C (Profit or Loss from Business).

The net profit from Schedule C is subject to both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare — the same taxes that W-2 employees split with their employers, but paid entirely by the self-employed individual. The current combined rate is 15.3% on net self-employment income up to the Social Security wage base.

Electing to be taxed as a corporation

A single-member LLC can elect to be taxed as a C-Corporation or S-Corporation by filing the appropriate election with the IRS. This changes the tax treatment significantly. Most discussions of S-Corporation elections for LLCs involve the potential to reduce self-employment tax — but the analysis depends on income level, reasonable compensation requirements, and administrative costs. This is a decision that warrants a specific conversation with a CPA, not a general rule.

New York State treatment

New York generally follows the federal disregarded entity treatment for income tax purposes. The LLC's income flows to the owner's personal New York State return. However, New York imposes an annual LLC filing fee that is separate from income tax and applies to most LLCs doing business in the state.

The filing fee is based on the LLC's New York source gross income and ranges from $25 to $4,500 per year. It is due with the LLC's annual filing and is separate from the owner's personal income tax return. Failing to file or pay the fee can result in penalties.

New York City considerations

New York City imposes its own Unincorporated Business Tax (UBT) on individuals and unincorporated entities — including single-member LLCs — that carry on a trade or business in the city. The UBT rate is 4% on net income, with an exemption for the first $100 of tax and a partial credit for city residents. Not every LLC owner will owe UBT, but those operating businesses in New York City should be aware of it.

Keeping separate records matters

Even though a single-member LLC is a disregarded entity for tax purposes, maintaining separate business bank accounts and records is important. Commingling personal and business funds makes it harder to identify deductible expenses, creates problems during tax preparation, and can undermine the liability protection the LLC structure provides.

A separate business checking account, consistent categorization of income and expenses, and regular reconciliation are the foundation of clean LLC bookkeeping.

When the complexity increases

A single-member LLC with straightforward service income and modest expenses is relatively manageable. Complexity increases when the LLC has employees, significant assets, inventory, multiple income streams, or when the owner is considering an S-Corporation election. It also increases when the owner has other income sources that interact with the LLC income in ways that affect estimated taxes, bracket positioning, or deduction eligibility.

These are situations where working with a CPA — rather than relying on software alone — tends to produce better outcomes.

Common mistakes

• Assuming the LLC filing fee does not apply because the business had a low-income year. The fee is based on gross income, not net profit.
• Commingling personal and business funds, making expense identification difficult at tax time.
• Not making estimated tax payments because the LLC "doesn't pay taxes." The owner pays taxes on the LLC income — the LLC itself does not file a separate federal return.
• Overlooking the New York City Unincorporated Business Tax for city-based business owners.