How Can I Lower My LLC Taxes?
Setting up and going into business on your own is now easier than ever.
Thanks to online business formation services, all the information and assistance you could, and will, need is easily accessible. LLC formation services are there to help you make the whole process go as smoothly as possible, here you can find useful and comprehensive guides on how to start an LLC by llc.services. Even so, that does not mean that your business formation will become stress-free as there will still be a lot to think about during the early stages.
With your focus on starting-up and all its complexities, it can be easy to give less thought to other important factors that will be coming your way further down the road – and one of those could well be of substantial financial consequence: taxes.
LLC Formation Taxes
We are all used to looking at our paychecks and seeing how much has been taken from them by the government. But for many people who have formed their first LLC company, it can be something of a shock to see for the first time that they are now having to pay considerably more in taxes than they did before they were their own boss and were still working for someone else’s company.
This is because while you are an employee on the payroll of anyone else’s business, you make financial contributions in part automatically from your gross income towards Social Security and any healthcare service you may be paying into. Then, your employer contributes the rest of the money owed. However, now that your own business formation is complete and in operation, you are now the self-employed owner of an LLC, and the requirement is for the entire amount to be paid – in full – and by you alone.
On top of this, you will still be required to pay the regular income taxes. Further to this, it is not uncommon – especially for first-time LLC business owners – to either unwittingly overpay on taxes by mistakenly overlooking deductions available to them or by the simple inefficient management of funds – or even sometimes both.
After all the effort that you have put into making your LLC business formation a success, it can then be somewhat disheartening to see such a large amount of hard-earned money being snatched away and tucked into the pocket of the IRS.
How To Lower Your LLC Service Taxes
- Employ an immediate family member;
- Open a Healthcare Savings Account;
- S Corps tax filing.
You’ll be pleased to know that there are ways in which it is possible to lower the amount of taxes your llc company will be deducted from its revenue. One effective way – and possibly one of the simplest – is to hire a family member as an employee and add them into your business formation. There are a couple of options available here that are permitted by the Internal Revenue Service (IRS).
If you are a parent, you are able to take on a child as an employee of your LLC. If you are the sole proprietor of the LLC business, you will then not be required to pay SS (social security) tax on your child’s wage packet. Alongside this, neither will you be required to pay Federal Unemployment tax. Every business that employs and payrolls staff incurs this tax – more commonly known as the payroll tax. This money goes to unemployment insurance and other related state services.
Employing your child (or children) can get you around these. Failing that, another option available to you is to employ your husband or wife as they too would not incur paying the Federal Unemployment Tax. This employment of an immediate family member could be the most convenient way for you to lower the overall cost of your tax deductions.
As an alternative – or as well as – one of the best and most beneficial ways of lowering your llc company tax is by saving money via the use of a Health Savings Account – or HSA. To do so requires you to have a high-deductible plan in place to begin with but the rewards for this in the bigger picture can be seen as decent compensation: there is a three-point advantage to going with this option. Firstly, your contributions to the HSA are made pre-tax. Secondly, tax-free, these savings will grow, and then finally, any withdrawals from the account for any qualifying medical expenditure will also be tax-free. Initiating this kind of saving for healthcare is arguably the most directly beneficial to your method of lessening the taxings on the business income of your LLC company.
File Your LLC Formation As A Corporation
When the time comes to pay your taxes, by default you will see that your LLC business incorporation is going to be taxed under the obvious assumption that it is run by either a sole proprietor or that it is run by a partnership. That is unless when you come to file your taxes you elect to use the option of having your business taxed instead as an S Corporation.
As the owner of your business, you will have been paying yourself a salary. The salary you pay to yourself will be taxed in just the same manner as that of any of your hired staff, or employees of any other business would be. The remainder of your llc business formations money will pass as what is called ‘distribution of business income’. This is income that will not be applicable for FICA taxes.
If you pick the option S-Corps as the status of your business when filing your tax, this can significantly lower the tax rate percentage on the first taxable $50,000 of income and furthermore, also save you having to pay much of your llc business revenue on self-employment tax – which you would now be able to avoid.
Finally, another way to save more of your LLC business profits from taxes is with a retirement plan. As an employee, with each paycheck, you are able to make a contribution toward your 401K which will usually be matched by your employer. As the owner of your own business, you of course have now surrendered this method of retirement funding. That being the case, there are several ways via specialist retirement savings companies that you can maximize your retirement funds while simultaneously getting large tax benefits.
A list of these recommended retirement savings businesses is available on the IRS website.
Dmitriy Kondratiev, chief Editor of LLC.services, associate in Axon Partners.
Experienced lawyer (Intellectual Property, Patenting, Contract law, Labor Law, International Private Law).
Worked with IT-companies Webxloo (Delaware), Autoxloo (Florida), SCC (Delaware)