An LLC is a pass-through entity, meaning it pays taxes through an individual income tax code rather than a corporate tax code. Sole proprietorships, S Corporations, and partnerships are also pass-through businesses, while C Corporations are not.
Tax Reduction Strategies for LLCs
One way to reduce taxes with the new tax law is to start an LLC. You may get a 20 percent deduction if your taxable income is below $157,500 if single or $315,000 if married. Some push to maximize savings.
There’s a range of taxes LLC owners might pay, including federal, state, and local income taxes. Whether you file as a single-member or multi-member LLC determines how you pay income tax. Single-member LLCs default to a disregarded entity, with income and expenses going on the member’s tax return.
LLCs provide flexibility in management and pass-through taxation. The LLC itself does not pay taxes. Its income/losses pass to members to report. Rules for LLCs vary by state, so it’s advisable to consult professionals to understand the specific rules in your jurisdiction.
Choosing the Right Structure and Managing Self-Employment Tax
To minimize taxes, choosing the right business structure is crucial. The default tax classifications for LLCs are single-member taxed as sole proprietorships and multi-member taxed as partnerships. However, you can elect S-Corp or C-Corp status to see which suits your business best.
The self-employment tax rate for LLCs is 15.3 percent. On $100,000 profit, this amounts to $15,300 in tax, which applies to net earnings and is a significant expense for most owners. Fortunately, the amount paid in self-employment tax is deductible on your personal income tax return.
Tax Considerations for LLCs
- If your net earnings from self-employment were less than $400, you don’t need to file a business tax return.
- Electing S-Corp status can help avoid higher self-employment taxes; consulting a CPA is recommended before making such changes.
To ensure the most tax-efficient operation, it’s essential to select the business entity that aligns with your specific circumstances, particularly in light of changes from the 2017 Tax Cuts and Jobs Act.