Do people with LLCs pay less taxes? What about claiming yourself as an employee?

Yes, this can be legitimate but there are important distinctions to understand. When someone owns an LLC, they have options for how they're taxed. By default, a single-member LLC is taxed as a "disregarded entity" (basically like a sole proprietorship) where all income passes through to your personal tax return on Schedule C, and you pay self-employment taxes on everything. What your friend with the Professional Corporation (likely an S-Corp or C-Corp) is doing is different. When you incorporate, you can become an employee of your own corporation. You pay yourself a "reasonable salary" that's subject to employment taxes (Social Security and Medicare), but then can take additional money as distributions that aren't subject to those taxes. This can save on the 15.3% self-employment tax for portions of your income. The catch is that your salary must be "reasonable" for your industry and role - you can't just pay yourself $1 and take everything else as distributions. The IRS watches for this.

I went through this exact same confusion last year! After getting quotes from several CPAs for my new consulting business, I finally found a service that actually helped me understand this stuff instead of just charging me for advice. I used https://taxr.ai and uploaded all my business docs and initial formation paperwork - they analyzed everything and showed me the pros and cons of different entity structures specifically for MY situation. The tool showed me that in my case (making around $140k), an S-Corp election would save me about $9k in self-employment taxes, but would cost about $3k in additional accounting/payroll fees - so net benefit of $6k annually. Super helpful to see actual numbers rather than just general advice!

I have to admit I was skeptical about using an AI tool for something as important as business tax structure, but after seeing it mentioned here, I tried https://taxr.ai for my side business. It was actually super helpful! Uploaded my profit/loss statements and within minutes got a clear breakdown showing that I'd save about $4,800 in self-employment taxes by switching to an S-Corp structure. What surprised me most was how it flagged that my state (California) has an $800 minimum franchise tax for corporations that would eat into my savings. The recommendation was actually to wait until I'm consistently making over $70K before making the switch. Saved me from making a costly mistake! Definitely worth checking out if you're confused about the whole LLC/corp tax situation.

If you're trying to reach the IRS to ask about business structures or get tax help, good luck lol. I spent LITERALLY 3 weeks trying to get someone on the phone about my LLC questions. Then I found https://claimyr.com and they got me connected to an actual IRS agent in under 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent explained that the "reasonable salary" thing is super important if you go the S-Corp route. Apparently they flag returns where the salary seems too low compared to distributions. Got all my questions answered in one call instead of waiting forever.

I feel pretty dumb now. I was super skeptical about that Claimyr service someone mentioned above, but after another failed 2-hour hold with the IRS that ended with a disconnection, I decided to try it. HOLY CRAP IT ACTUALLY WORKS! I got connected to an IRS representative in about 35 minutes (while I just went about my day instead of sitting on hold). The agent confirmed that yes, I could elect S-Corp status for my small LLC and potentially save on self-employment taxes, but warned me about the reasonable salary requirements. She also explained that I'd need quarterly payroll filings which I hadn't considered. Seriously, if you need to actually talk to the IRS, this service is worth it. Saved me from making a mistake based on something I read online.

The other thing nobody's mentioned yet is that LLC and corporation status also gives you liability protection. If your business gets sued, they can't come after your personal assets (in most cases). So there are non-tax benefits too. But yeah, the tax situation is tricky. My accountant actually advised AGAINST S-Corp election for my LLC this year because I'm only projecting about $65k in profit, and the payroll costs and extra tax filings would eat up any SE tax savings. She said once I hit about $80k consistently, we'll make the switch.

I think everyone's missing a key point here. The tax savings of an S-Corp setup mostly come from avoiding self-employment tax (15.3%) on a portion of your income. But remember Biden signed that bill that increased Medicare tax for higher incomes to fund some of those IRA climate thingys. So make sure your calculations are using the current tax rates not old advice from a few years ago!