How to Limit Taxes as a Single Member LLC

A single-member limited liability company (SMLLC), which has one owner registered in the state where it conducts business, is one of the most frequent types of small enterprises in the United States. Single-member LLCs, like sole proprietorships, are required to pay self-employment tax, and LLC owners who hire employees require an EIN.

How Are Single-Member LLC Taxes Calculated?

Understanding the IRS tax system is the first step. The IRS treats your single-member LLC as a sole proprietorship, necessitating the filing of a Schedule C. A Schedule C is included in your Form 1040 Individual Income Tax Return.

Schedule C is where you disclose all of your business income and deductible costs each year. Any remaining net income on the bottom line of Schedule C will be carried over to the first page of the 1040 Form, subject to your marginal income tax rate (about 20% to 35%) and self-employment Social Security and Medicare contributions. As a result, deductible expenses can save you up to 50 cents on every dollar of business income. This is why, from the start, you should keep a detailed and separate account of all business income and costs. This will make preparing an accurate Schedule C each year much easier.

What Is the Primary Tax Advantage of an LLC?

The term ‘pass-through’ is used to describe how an LLC is taxed. This is the method by which the LLC’s earnings can be transmitted directly to the owner or owners without first paying corporate federal income taxes. Pass-through entities, such as sole proprietorships and partnerships, pay taxes as well. These firms do not pay any federal income taxes. Instead, its gains are distributed to their owners, who are responsible for paying taxes on them at their respective rates.

This is in contrast to regular C corporations, which get taxed twice. The firm, in particular, is responsible for paying taxes on its profits. Any payouts to the company’s owners are then taxed as personal income. Avoiding double taxation can save a lot of money over time. One of the most significant tax advantages of forming an LLC is that it allows you to avoid double taxation.

Hidden Tax Deductions for Your Single Member LLC

Promotional materials and postage, food and beverage at showings, and the cost to mail, exchange, or return products are all obvious deductible expenses that will be paid out of the LLC bank account. These easily visible deductions are used by the majority of entrepreneurs. To begin, open a separate bank account for your single-member LLC. This is the account into which you deposit your business income and pay your business costs. For your tax records, this will provide you with a record of all business income and costs.

The true savings for your organization, though, are hidden deductions in the fine print. To be clear, it is legal to use these deductions. These guidelines were created by the IRS to make tax records for home companies easier for both you and the IRS. Not-so-obvious business expense deductions can save you a lot of money. You can write cheques to yourself out of the business bank account to compensate yourself for such deductions on Schedule C.

If you need ways to limit your taxable income, consider some of the following methods below.

Employ a Member of Your Family

Hiring a family member is one of the finest strategies to decrease taxes for your small business. The Internal Revenue Service (IRS) provides several options, all of which can protect income from taxes. You can even hire your children to work for you.

Sole proprietorships are exempt from paying social security and Medicare taxes, as well as the Federal Unemployment Tax Act (FUTA) tax. It’s crucial to note that earnings must be derived from legitimate commercial purposes. Small business owners can potentially reduce their taxes by hiring a spouse who is not subject to the FUTA tax. You may be able to set aside retirement savings for them depending on the perks they receive from another work.

Make a retirement plan now

You forfeit a 401(k) match if you own a small business. There are, however, several retirement account options that can help you optimize your retirement savings while also providing tax advantages. The IRS, for example, allows you to contribute up to $57,000 in total contributions to a single-participant 401(k) plan for retirement.

Save money for medical expenses

Putting money away for healthcare expenses is one of the best methods to lower small business taxes. Medical prices are rising, and even if you are currently healthy, saving money for unexpected or future healthcare requirements is critical. If you have a high-deductible health plan that qualifies, you can do so with a Health Savings Account (HSA).

Change the way you do business

You don’t have the benefit of having your employer pay a percentage of your taxes as a small business owner. You are responsible for all Social Security and Medicare taxes. You must still pay such taxes if your company is taxed as a limited liability corporation (LLC), however, you may be able to remove the employer-half of those two tax obligations in certain circumstances. For some small firms, this can be a smart move. While there are several factors to consider before making this step, including paying oneself a decent income and other dangers, it can be an excellent strategy to lower your tax liability.

Travel Expenses Can Be Deducted

If you travel frequently for business, you may be able to reduce your business taxes. Personal travel is not tax-deductible, whereas business travel is. Small business owners, on the other hand, can combine personal travel with a justifiable business purpose to maximize their business travel. Any frequent flier miles accrued during business travel can be redeemed for personal travel at a later date.

Conclusion

Taxes can be a source of anxiety for a small business owner. Fortunately, there are numerous tax-saving strategies available to help you reduce your taxable liability as a business owner. As a small business owner, you can reduce your taxable income and keep more of your money working for you with careful planning. Just make sure to check with a tax professional to see if you qualify for the potential savings.