How To Pay Less Taxes With an LLC

Introduction.

Taxes. Ugh. No one likes paying them, but they’re a part of life. However, if you own a business or are thinking about starting one, there’s a way to make sure you’re not paying more than you have to. Setting up an LLC, or Limited Liability Company, could be a game-changer when it comes to managing your taxes.

It’s one of the most common business structures for entrepreneurs, and for good reason: it offers flexibility and some great tax-saving benefits.

Now, I get it. Taxes can seem complicated, and when you throw in something like an LLC, it might feel like you need to go back to school just to understand how it works. But that’s not the case.

Here’s the deal: if you have an LLC, you have options for reducing your taxable income. That means you can keep more of the money you’ve worked hard to earn. Sound good? Let’s take a look at how you can pay less taxes with an LLC in simple terms.

What Is an LLC and Why Should You Care About It?

An LLC is a business structure that combines the benefits of a corporation with those of a sole proprietorship or partnership.

Essentially, it gives you limited liability protection (meaning you’re not personally responsible for business debts) and lets you take advantage of certain tax benefits.

But here’s the important part: when it comes to taxes, an LLC is what’s known as a “pass-through entity.”

That means the business itself doesn’t pay taxes directly. Instead, the profits and losses are “passed through” to you, the owner, and you report them on your tax return.

This is one of the biggest perks of an LLC, as it avoids the “double taxation” that some corporations face.

How Do I Pay Less Taxes with an LLC?

Now that we’ve got a basic understanding of LLCs, let’s dive into the ways you can save on taxes as an LLC owner.

1. Tax Deductions for Business Expenses

The first thing you need to know about LLCs is that, as a business owner, you’re eligible for a variety of deductions that can lower your taxable income. This is one of the easiest and most common ways to reduce taxes.

Some of the common business expenses you can deduct include:

Office Supplies and Equipment: Pens, paper, computers, and anything else you use for your business.
Home Office Deduction: If you work from home, you can deduct a portion of your rent or mortgage, utilities, and even your internet bill.
Vehicle Expenses: If you use your car for business, you can deduct a percentage of your vehicle expenses (like gas, maintenance, and insurance).
Travel and Meals: Business travel expenses, including flights, lodging, and meals, are deductible.
Employee Wages and Freelancers: If you have employees or hire contractors, their wages are deductible.

Keep in mind that in order to take these deductions, you’ll need to keep accurate records. It’s not just about saving receipts—it’s about being able to prove the expenses are for business purposes.

2. Self-Employment Tax Savings with an S-Corp Election

Here’s where things get interesting. One of the best ways to lower your tax burden with an LLC is by electing to be treated as an S-Corp. It’s still technically an LLC, but with this election, the IRS treats it like an S-Corp for tax purposes.

Why does this matter? Because if you’re running an LLC as a sole proprietor, you’re required to pay self-employment taxes (Social Security and Medicare) on all your income, which can be a big chunk of your earnings.

But with an S-Corp election, only your salary is subject to self-employment taxes. The rest of the profits can be distributed to you as dividends, which aren’t subject to those same taxes.

For example, let’s say your LLC made $100,000 in profit this year. If you’re taxed as a sole proprietor, you’d pay self-employment taxes on the full $100,000.

But with the S-Corp election, you might pay yourself a reasonable salary of $50,000 and then distribute the remaining $50,000 as dividends.

Only your $50,000 salary would be subject to self-employment taxes, potentially saving you thousands of dollars.

To make this work, you’ll need to set a “reasonable salary” for yourself based on what other people in your industry are making. You can’t just pay yourself a tiny salary and take huge dividends, or the IRS might come knocking.

3. Retirement Savings for Tax Deferral

Another big perk of owning an LLC is the ability to set up retirement accounts like a Solo 401(k) or a SEP IRA.

These accounts let you save for retirement while also reducing your taxable income. Contributions to these accounts are tax-deductible, meaning the more you contribute, the less you pay in taxes.

With a Solo 401(k), you can contribute both as an employee (up to $22,500 for 2024) and as an employer (up to 25% of your income).

This allows you to contribute a larger amount than you might be able to with a traditional IRA or 401(k) plan.

Plus, the money you contribute to these accounts grows tax-deferred, meaning you won’t pay taxes on it until you withdraw it in retirement. This is a great way to save for the future while also lowering your current tax bill.

4. Health Insurance Deduction for LLC Owners

If you’re a self-employed LLC owner, you might be able to deduct the cost of your health insurance premiums.

This deduction is available whether you buy insurance through the marketplace or a private insurer.

As long as you’re not eligible for coverage through a spouse’s plan or another employer, you can deduct your health insurance premiums as an “above-the-line” deduction, which means you don’t have to itemize to claim it.

This can save you a decent amount of money, especially if you’re covering your spouse or children as well.

5. Paying Family Members

You might be able to pay your family members for legitimate work they do for your LLC, which could help reduce your taxable income.

For example, if you hire your teenage child to do some office work or social media management, you can pay them a reasonable wage, and that money is a deductible business expense.

Additionally, if you’re paying your child or spouse, you might be able to shift some of the income to them, especially if they’re in a lower tax bracket. Just make sure the work you’re paying them for is real and not just a tax loophole.

6. State-Specific Tax Benefits

Different states have different tax rules when it comes to LLCs. Some states, like Delaware, Wyoming, and Nevada, are known for their business-friendly tax environments.

If your business operates in one of these states, you may be able to take advantage of lower state taxes, making it even easier to save on your tax bill.

Even if you don’t live in one of these states, it may still be worth looking into the tax rules in your state to see if there are any opportunities for savings.

FAQs

1. Can an LLC avoid paying taxes altogether?

No, an LLC doesn’t avoid taxes, but it offers ways to minimize your tax liability. LLCs themselves don’t pay federal taxes, but the owners report the business income on their taxes.

2. What is the downside of electing S-Corp status for my LLC?

The main downside is that you’ll need to run payroll for yourself, which comes with additional paperwork and possible administrative costs. If your business is small and you’re not making a lot of money, this may not be worth it. However for larger LLCs, the tax savings can be significant.