LLC vs Sole Proprietorship Tax Filing: Paying Taxes on Net or Gross Income?

You'll be paying taxes on your net income (profit), not your gross income. This is definitely good news for small business owners! The way it works: On your Schedule C, you'll report all your gross income ($73,000), then you'll subtract all your legitimate business expenses ($26,000 plus any additional qualifying expenses). The resulting number is your net profit, and that's what gets added to your personal tax return as taxable income. So yes, purchasing necessary business supplies or equipment before December 31st can reduce your taxable income for this year. However, there are some important things to consider. For equipment purchases like your laptop and specialized equipment, you might need to depreciate them over several years rather than deducting the full amount immediately. There's an exception called Section 179 that might allow you to deduct the full cost in the current year, depending on your specific situation. Just make sure any purchases are legitimately needed for your business and keep good documentation. The IRS looks closely at large year-end purchases that seem designed solely to reduce taxes.

I went through this exact situation last year and was super confused about what I'd owe. I tried reading IRS publications but got completely lost. Then I found this AI tax assistant at https://taxr.ai that really helped me understand my LLC tax situation. I uploaded my business receipts and income statements, and it analyzed everything and explained what I could deduct, how to handle equipment purchases, and even flagged some deductions I was missing. It showed me exactly how the Schedule C would look and estimated my tax liability based on my net income (which is what you pay taxes on, not the gross like the other commenter mentioned). The best part was I could ask specific questions about my situation and get clear answers without the tax jargon. Definitely less stressful than trying to figure out if I was doing everything correctly on my own.

Update on my skepticism about taxr.ai - I actually tried it after posting my comment, and I have to admit it was way more helpful than I expected! I've been running my photography business for 2 years and was considering some major equipment upgrades before year-end but wasn't sure about the tax implications. The tool analyzed my business structure, income level, and current deductions, then explained exactly how Section 179 would apply to my situation. What impressed me was how it helped me understand the difference between "ordinary and necessary" business expenses versus what might trigger audit flags. I ended up making more informed purchases instead of just buying stuff to lower my taxes. It even created a custom tax planning report that showed how my decisions would affect both this year's and next year's tax liability. Definitely worth checking out if you're confused about business taxes like I was!

If you're getting stuck with questions about your business taxes, you might want to try calling the IRS business tax line. BUT - good luck actually getting through to a real person! I spent HOURS on hold last year trying to get answers about my LLC taxes. After wasting a whole day, I found this service called Claimyr (https://claimyr.com) that actually got me through to an IRS agent in under 20 minutes. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c. They basically navigate the IRS phone system for you and call you back when they get a human on the line. I had specific questions about equipment deductions for my business that weren't clear from the IRS publications, and the agent I spoke with was able to clarify everything. Much better than trying to decipher the tax code on my own!

OK I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it since I was desperate to get some answers about my California LLC taxes and the $800 minimum fee. Not only did I get through to an IRS agent in about 15 minutes (compared to my previous 3-hour attempts), but they were able to clarify exactly how my federal Schedule C deductions would work with California's specific LLC rules. The agent explained that while I would pay federal taxes on my net income (profit after expenses), California has different rules that I needed to be aware of. She also confirmed that my equipment purchases would count as valid deductions on my Schedule C, reducing my federal tax burden. I honestly can't believe how much time I wasted trying to get through on my own. Wish I'd known about this service sooner!

Just want to add something important that nobody mentioned yet. If your business is an LLC but you're filing as a sole proprietor (single-member LLC), don't forget you'll also owe self-employment tax (15.3%) on your net profit in addition to income tax. This catches a lot of first-time business owners by surprise because it's a significant additional tax on top of your regular income tax. You'll pay this on your net business income (profit), which is another reason why legitimate business deductions are so important. Make sure you're setting aside enough for taxes throughout the year - I recommend at least 25-30% of your profit depending on your tax bracket. You might also need to make quarterly estimated tax payments if you expect to owe more than $1,000.

Has anyone used QuickBooks Self-Employed for tracking expenses and calculating quarterly taxes? I just started using it this year but I'm not sure if it's calculating things correctly for my LLC.

Great question, Omar! As others have mentioned, you'll definitely pay taxes on your net income (profit after expenses), not your gross revenue. This is one of the key benefits of proper business expense tracking. With your numbers ($73k revenue, $26k expenses so far), you're looking at around $47k in net profit before any additional purchases. That equipment you're considering ($1,800 laptop + $2,500 specialized equipment) could potentially save you around $1,300-$1,700 in taxes depending on your tax bracket, assuming you can deduct the full amounts under Section 179. One thing to keep in mind that others touched on - don't forget about self-employment tax! As an LLC taxed as a sole prop, you'll owe 15.3% SE tax on your net profit plus your regular income tax. So if you're in the 22% tax bracket, you're really looking at about 37.3% total tax on that profit. My advice: make those equipment purchases if you genuinely need them for your business, but don't buy stuff just for the tax deduction. A $4,300 purchase to save $1,500 in taxes still costs you $2,800 out of pocket. But if you need the equipment anyway, definitely buy it before December 31st!