Key Takeaways

  • LLC members are generally subject to self-employment tax on their share of business income if they actively participate in the business.
  • Self-employment tax consists of Social Security (12.4%) and Medicare (2.9%), totaling 15.3% of net earnings, with an additional 0.9% Medicare surtax for high earners.
  • Choosing the right business structure (e.g., electing S corporation status) can significantly reduce self-employment tax liability.
  • LLC members can deduct the “employer-equivalent” portion of self-employment tax when filing income taxes, which helps offset the total owed.
  • Special considerations apply to multi-member LLCs, passive investors, and members who only provide capital without services.
  • Proper tax planning, reasonable salary allocation, and quarterly estimated payments are essential to avoid IRS penalties and overpayment.

Self-Employment Tax LLC

Self-employment tax LLC is the Social Security and Medicare tax obligation placed on self-employed individuals. The self-employment tax is designed to parallel the combined Social Security and Medicare tax liability assumed by employees and employers within a typical business structure.

In particular, the Social Security tax in 2018 is 12.4 percent of income up to $127,200. Employers and employees both contribute equally to fulfill this tax obligation. However, self-employed individuals are responsible for the entire Social Security tax obligation. Similarly, the Medicare tax is 2.9 percent of all income received, and self-employed individuals must pay this. In addition, higher earners pay an additional 0.9 percent tax on their income above a certain income threshold ($200,000 for single filers).

The combined 12.4 percent Social Security tax and the 2.9 percent Medicare tax is jointly known as the self-employment (SE) tax.

Understanding LLC Self Employment Tax in Depth

When you operate a business as an LLC member and actively participate in its operations, the IRS considers you self-employed. This means you’re responsible for paying self-employment tax — the combined Social Security and Medicare contributions typically split between employer and employee in traditional employment settings.

The current self-employment tax rate is 15.3% on net earnings, broken down as:

  • 12.4% Social Security tax on the first $168,600 of earnings (for 2025)
  • 2.9% Medicare tax on all earnings
  • 0.9% Medicare surtax on earnings above $200,000 (single) or $250,000 (married filing jointly)

Unlike employees, who share these costs with their employer, LLC members must pay the full amount themselves. However, they can deduct half of this tax — the “employer-equivalent” portion — when calculating their adjusted gross income, which reduces overall tax liability.

How Does Forming a Business Entity Affect my Self-Employment Tax Obligations?

As a self-employed individual, you typically must make quarterly payments to the Internal Revenue Service (IRS) of your estimated SE tax, as well as your income tax. Not doing so could expose you to punitive actions by the IRS, including fines and penalties. Importantly, there are several types of business entities that do not serve as a tax shelter from the SE tax. These include:

  1. Sole proprietorships
  2. General partnerships
  3. LLCs that file as disregarded entities

For example, a general partnership may pay the SE tax on behalf of each general partner, or each general partner may be responsible for paying the SE tax to the IRS individually.

Notably, there are three types of business structures that do offer a tax shelter to the SE tax. These include:

  1. Limited partnerships
  2. S corporations
  3. LLCs, when the LLC elects to be taxed as an S corporation

Who Pays Self Employment Tax in an LLC?

Not every LLC member is treated the same for self-employment tax purposes. Whether you owe it depends on how you participate in the business and how the LLC is taxed:

  • Single-Member LLCs (Disregarded Entities): The owner reports business income on Schedule C and pays self-employment tax on all net earnings.
  • Multi-Member LLCs (Partnership): Each member pays self-employment tax on their share of business income if they materially participate in operations.
  • Passive Members or Investors: Members who only contribute capital but do not participate in day-to-day management may not owe self-employment tax on their share of profits.
  • Electing S Corporation Status: LLCs that elect to be taxed as S corporations can reduce self-employment tax liability, as only salaries (not profit distributions) are subject to employment taxes.

The Limited Partnership

The limited partnership is perhaps the simplest business structure to understand with respect to the SE tax. In particular, the limited partnership includes two levels of partners: general partners and limited partners.

General partners are legally liable for all aspects of a business, including the day-to-day operations and/or other managerial roles. Limited partners, however, are only liable for a particular aspect of a business. For example, a limited partner may not be associated with the general operations of a business, but may instead simply provide a capital investment into a business (i.e., be a shareholder in a business).

In instances where the limited partner does not have any direct involvement in the operations of the business, the shareholder profits (i.e., income that is received as an owner of a business) received by the limited partner are not subject to the SE tax. However, the compensation received by a general partner for his work performed in the business is subject to the SE tax. There is an ongoing discussion as to whether the shareholder profits received by general partners are subject to the SE tax. Current law suggests that all shareholder profits are exempted from the SE tax; however, it is recommended that you consult with a tax professional on this technically.

S Corporations

An S corporation is a type of business entity that is designed to provide a tax advantage status to small business owners. S corporations operate as a powerful tax shelter from the SE tax.

For example, in an S corporation, there are two types of income that a business owner may receive. The first type is compensation for work performed. This type of income parallels the income derived by an employee of a typical corporation (C corporation). Accordingly, this income is exposed to the SE tax.

However, as an owner of the S corporation, you are also entitled to shareholder profits. Importantly, these are not exposed to the SE tax. As the owner of the business, you get to decide your compensation package. As long as you pay yourself a reasonable compensation for work performed, you can increase your shareholder profits to significantly reduce your exposure to the SE tax.

Reducing Self Employment Tax Through S Corp Election

One of the most effective strategies for reducing LLC self employment tax is electing to have your LLC taxed as an S corporation. With this option, you split income into two categories:

  1. Reasonable salary: This is subject to payroll taxes (Social Security and Medicare).
  2. Distributions: The remaining profit passed to owners as distributions is not subject to self-employment tax.

The IRS requires that the salary you pay yourself be “reasonable” — typically comparable to what someone in your role and industry would earn. Paying too little may trigger IRS scrutiny, while paying too much defeats the purpose of the election. Still, this strategy can significantly reduce the self-employment tax burden for many LLC owners.

LLCs

An LLC is a limited liability company, where each business owner is considered a member of the LLC.  Importantly, the members of an LLC may elect to be taxed as a disregarded entity or as an S corporation. Electing to be taxed as an S corporation provides similar tax advantages to the above described S corporation.

If you are a business owner, consider forming a limited partnership, an S corporation, or electing for your LLC to be treated as an S corporation to reduce your tax liabilities. As always, consulting with a qualified tax adviser is always recommended.

Tax Planning Strategies to Lower Your Liability

There are several additional ways LLC owners can manage or reduce their self-employment tax liability:

  • Deduct Business Expenses: Lower your taxable income by deducting eligible expenses such as home office costs, equipment, software, and professional services.
  • Maximize Retirement Contributions: Contributing to a SEP IRA or Solo 401(k) reduces net earnings and therefore self-employment tax.
  • Make Quarterly Estimated Payments: Avoid penalties by paying estimated self-employment tax quarterly instead of waiting until year-end.
  • Split Income Strategically: If you’re in a multi-member LLC, structuring roles and responsibilities carefully may reduce how much of your income is subject to self-employment tax.
  • Hire Family Members: In some cases, employing family members in the business can shift income into lower tax brackets or reduce total employment taxes.

Frequently Asked Questions

  1. How is self-employment tax calculated for LLC owners?
    Self-employment tax is generally 15.3% of net earnings (12.4% Social Security + 2.9% Medicare). You can deduct half of this tax on your income tax return.
  2. Do all LLC members have to pay self-employment tax?
    No. Only members who actively participate in running the business typically pay self-employment tax. Passive investors or limited partners may be exempt on their share of profits.
  3. Can an LLC avoid self-employment tax entirely?
    While it’s not possible to avoid it entirely if you’re actively involved, electing S corporation status can reduce the tax burden by treating part of your income as distributions.
  4. Are profit distributions from an LLC subject to self-employment tax?
    They are if you’re an active member in a default LLC structure. However, in an S corporation, distributions are generally not subject to self-employment tax.
  5. What happens if I don’t pay self-employment tax?
    Failing to pay or underpaying can result in IRS penalties, interest, and potential audits. Making timely quarterly payments helps avoid these issues.

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