Quick recap of the big idea from lesson 1: the IRS doesn't have an LLC tax. So how does the money you earn through an LLC get taxed? Short answer: it flows straight onto your personal tax return, picks up an extra 15.3% tax along the way, and arrives on a quarterly schedule nobody warned you about. Let's walk the whole path of a freelance dollar.
Pass-through: the business doesn't pay, you do
By default, a single-owner LLC is what the IRS calls a "disregarded entity" — for taxes, it's as if the LLC isn't there. The profit passes through to your personal return. This is pass-through taxation, and it works in three steps:
- Schedule C — a form attached to your regular tax return. Income at the top, business expenses below, net profit at the bottom.
- That profit is taxed as ordinary income, using the same brackets as any job.
- It also gets hit with self-employment tax — the part that shocks every first-year freelancer.
One crucial mechanic: you're taxed on profit, not on what you pay yourself. If your LLC earns $60,000 and you only transfer $35,000 to your personal checking, you still owe tax on $60,000. Moving money from the business account to yourself (an "owner's draw") is a non-event to the IRS — like moving cash between pockets.
The 15.3%: self-employment tax
Remember from the W-2 vs 1099 lesson that every employee pays 7.65% in FICA — and the employer matches it. When you're self-employed, you're both. The combined self-employment tax is 15.3% of your net earnings:
| Piece | Rate | Funds |
|---|---|---|
| Social Security (both halves) | 12.4% | Retirement & disability benefits |
| Medicare (both halves) | 2.9% | Health coverage for people 65+ |
| Total | 15.3% | — |
This applies on top of regular income tax, and it starts from nearly the first dollar of profit — long before income tax kicks in. Two small mercies: the tax is computed on 92.35% of your profit (a built-in adjustment), and you get to deduct half of the SE tax from your taxable income. Together they soften the blow slightly — but plan around 15.3% and let the softening be a pleasant surprise.
Nobody withholds, so you pay quarterly
At a job, withholding drips your taxes to the IRS every payday. Self-employed, you are the withholding department. The IRS expects quarterly estimated payments — four deadlines (roughly April 15, June 15, September 15, and January 15) — and charges an underpayment penalty if you wait and pay it all in April, even if you pay in full.
The simple system that works:
- Open a separate savings account labeled "taxes."
- Move 25–30% of every client payment into it, immediately and unemotionally.
- Each quarter, pay the IRS from that account (online at IRS Direct Pay in about five minutes).
The S-corp election: real, useful, oversold
Social media's favorite "tax hack" is electing S-corporation status for your LLC. It's real — and it's profitable only at the right income level. Here's the plain-English version.
An S-corp election is a form you file with the IRS that changes how your LLC is taxed (the LLC itself stays the same state entity). After electing:
- You must put yourself on payroll and pay yourself a reasonable salary — roughly what you'd pay someone else to do your job. The salary gets FICA taxes, just like any paycheck.
- Profit above the salary passes through to you without the 15.3% self-employment tax.
The catch is the word reasonable. You can't earn $100,000 doing full-time consulting and pay yourself a $20,000 salary — the IRS audits exactly this, and "whatever makes my taxes lowest" is not a defensible number.