How to Reduce Taxes Using an LLC

By Joseph Nicholson

If you receive a 1099 for nonemployee compensation, or operate a sole proprietorship or partnership, you are probably paying too much in taxes. You may be able to minimize self-employment tax liability by utilizing the flexibility of an LLC's tax treatment. If you are not already organized as a business entity, doing so will allow you to write off certain expenses related to the business.

Step 1

Elect to be taxed as an S corporation by filing Form 2553 with the IRS. Your company will remain an LLC and provide personal liability protection, but you will no longer be taxed under the default rules for LLCs. For federal tax purposes, LLC members will now be considered shareholders rather than partners, and will not be liable for self-employment tax on profit distributions.

Step 2

Pay any managers a minimally reasonable salary. The person or persons who manage the day-to-day operations of the business should be paid a salary that is commercially reasonable, which will be treated as ordinary income. If the managers are also members, they will be subject to self-employment tax on this income.

Ready to start your LLC? Start an LLC Online Now

Step 3

Complete Form 1120S. Though this form does not need to be filed, it will help you calculate the profits of the company. The manager's pay, as well as other legitimate business expenses, can be deducted before taxes. The remainder can be distributed as profit and reported on Schedule E of the individual owner's tax return.

Ready to start your LLC? Start an LLC Online Now
How to Report Income as an LLC Member


Related articles

Classifying Payments to Yourself in a Sole Proprietorship

Running a business as a sole proprietorship rather than a formal legal entity, such as a corporation, can greatly simplify your annual tax return filings. One reason for this is that the IRS doesn’t treat your business as a distinct taxpayer for which a separate tax return must be filed. Additionally, since payments that you make to yourself can only be classified in one way, it is one less issue for you need to deal with at tax time.

IRS Instructions for a Business Name Change

If you change the legal name of your business, then as the owner, partner or corporate officer, you are authorized to file the name change with the Internal Revenue Service. How you complete this filing, and which form of notice you use, depends on what type of business you're running.

Pros & Cons of LLP Vs. Partnership

Limited liability partnerships, or LLPs, and partnerships, which are sometimes referred to as "general partnerships," are types of business entities that require two or more individuals to create. In general, these two business entities are quite similar with the major exception of liability protection. Online legal document preparation and filing services can help you form a general partnership or LLP.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Deducting a Salary for a Single-Owner LLC

Creating a limited liability company for your business instead of operating it as a sole proprietor affects your ...

How to Pay Taxes for a Limited Liability Corporation in Michigan

As a limited liability company in Michigan, you have tax obligations to the state and the IRS. Tax obligations for LLCs ...

Can I Pay Myself As an Employee As the Owner of an LLC?

A limited liability company is a relatively new form of business organization that combines elements of a corporation ...

How to Fill Out a W9 for a Sole Proprietor

If you own and operate a business and choose to run it as a sole proprietorship rather than creating a separate ...

Browse by category
Ready to Begin? GET STARTED