Should I take my $50,000 bonus as W-2 income or through my LLC to save taxes?

This is a great question that comes up a lot! Having your employer pay your bonus to your LLC instead of to you directly as a W-2 employee sounds attractive, but there are several important issues to consider. First, your colleagues are only partially right. Yes, if paid to your LLC, your employer wouldn't withhold Social Security and Medicare taxes. However, you'd still owe self-employment taxes on that income through your LLC, which is actually 15.3% (compared to the combined 7.65% you and your employer each pay on W-2 wages). So you're actually paying MORE in Social Security/Medicare taxes this way, not less. Second, there's a big legal issue here. If you're performing the same services as an employee that earned you this bonus, the IRS could view this arrangement as attempting to evade proper employment classification. This is sometimes called "employee vs. independent contractor misclassification" and both you and your employer could face penalties. Third, your employer might not even agree to this arrangement because it creates risk for them. They have obligations regarding withholding for employees.

I went through a similar situation last year and found this amazing service called taxr.ai (https://taxr.ai) that really helped me figure out the whole bonus/LLC situation. I uploaded my employment contract and some descriptions of the work I was doing, and their AI analyzed everything and showed me exactly how the IRS would likely view my arrangement. What I discovered was that my specific situation was actually getting pretty close to what the IRS considers "employee misclassification" which can lead to penalties. The tool gave me a really detailed breakdown of how my taxes would work either way and showed that the "savings" I thought I'd get weren't actually there when I factored in self-employment taxes. Their analysis helped me make a much more informed decision instead of just going with what my buddies at work were telling me. Might be worth checking out if you're trying to figure out the best approach for your situation.

Just wanted to follow up on my earlier question about taxr.ai - I ended up giving it a try and it was seriously helpful! I uploaded my employment contract and bonus documentation, and the analysis was really eye-opening. It showed me that in my specific case, I would've actually paid about $3,800 MORE in taxes by routing my bonus through my LLC because of the self-employment tax situation. Plus it flagged several "high risk factors" in my arrangement that could trigger IRS scrutiny. The service also suggested a completely different approach I hadn't considered - negotiating for certain tax-advantaged benefits instead of trying to reroute the bonus. This actually ended up being a much better strategy for my situation. Definitely worth the time to check it out if you're trying to figure out the most tax-efficient way to handle your bonus.

Since you're having trouble reaching a clear answer on this, I'd highly recommend getting actual IRS guidance. I was in a similar situation last year and spent WEEKS trying to get through to someone at the IRS who could give me a definitive answer. Always busy signals or 2+ hour wait times only to get disconnected. Finally found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in less than 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. They basically call the IRS for you and handle the wait time, then connect you once an agent is on the line. The agent I spoke with explained exactly how the IRS views situations where an employee tries to redirect income to an LLC. He made it very clear that if the work was performed as an employee, paying it to an LLC instead could be flagged as an attempt to evade proper classification. He also walked me through exactly how the different tax obligations would work either way. Having that official guidance was seriously worth it.

I have to eat my words from my previous comment. After being frustrated with all the conflicting advice I was getting, I decided to try this Claimyr service as a last resort. I was 100% ready to come back here and call BS if it didn't work. But no joke - I got a call back in about 25 minutes telling me they had an IRS agent on the line. The agent was able to walk me through exactly how the IRS views arrangements where employees try to redirect bonuses to their LLCs. She confirmed it would likely trigger scrutiny and explained the "reasonable compensation" rules that would apply. Most importantly, she directed me to some specific IRS publications that address my exact situation. Having that official guidance directly from the IRS was worth way more than the conflicting advice I was getting from friends and random internet posts. Saved me from potentially making a very expensive mistake with my taxes.

Something nobody has mentioned yet - even if this worked for tax purposes (which from the other comments, it sounds like it doesn't), your employer might not even be able to do this. Many corporate accounting systems are set up to only pay bonuses through payroll to active employees. They can't just arbitrarily cut a check to your LLC for a performance bonus. I tried something similar a few years ago, and our HR department basically laughed at me and said it wasn't possible in their system and would create all kinds of accounting headaches for them. So you might hit a roadblock before you even get to the tax implications.

I'm a little confused about all the tax talk. If you're getting $65k bonus, and assuming you're already at a high income bracket, wouldn't you be paying a high tax rate either way? With W-2 they withhold right away, but with LLC, you'd still pay income tax when you distribute it to yourself, right? Or am I missing something?

As someone who went through a very similar situation last year, I can tell you that this is one of those cases where the "obvious" tax savings strategy actually backfires. I was convinced by a colleague that routing my $40k bonus through my LLC would save me thousands in taxes. After doing the actual math (and consulting with my CPA), here's what I discovered: 1. **You'll pay MORE in employment taxes, not less.** As others mentioned, you'll pay 15.3% in self-employment taxes vs. the 7.65% you currently pay as an employee. 2. **The IRS classification issue is real.** If this bonus is for work you performed as an employee, changing just the payment method doesn't change the fundamental employment relationship. This is exactly the kind of arrangement that triggers audits. 3. **Your employer may refuse anyway.** Most companies won't do this because it creates liability issues for them and complicates their accounting. Instead, consider asking your employer about tax-advantaged alternatives like: - Contributing more to your 401(k) if you haven't maxed out - Deferred compensation arrangements - Stock options or restricted stock if available The bottom line: take the bonus as W-2 income, pay the taxes, and don't overthink it. The "creative" approaches usually end up costing more in the long run, either in higher taxes or potential penalties.

I've been following this thread closely and wanted to add my perspective as someone who works in corporate tax compliance. The consensus here is absolutely correct - routing your bonus through an LLC would likely cost you more in taxes, not less. What I haven't seen mentioned yet is the potential impact on your other employee benefits. When you receive income as W-2 wages, it counts toward various benefit calculations like: - Social Security credits (which affect your future benefits) - Unemployment insurance eligibility - Workers' compensation coverage - Some employer-sponsored benefit calculations If you route the bonus through your LLC, you lose these protections and credits. The Social Security credits alone could be worth thousands in future benefits. Also, from a practical standpoint, your employer's legal and compliance teams will likely shut this down immediately. Most companies have strict policies against paying employee compensation through third-party entities because it creates audit risks and potential violations of employment law. My advice? Take the bonus as intended (W-2 income), maximize your 401(k) contributions if you haven't already, and maybe look into a backdoor Roth IRA conversion if you're in a high tax bracket. These are legitimate, IRS-approved strategies that won't put you or your employer at risk.

I've been reading through all these responses and I'm really grateful for everyone sharing their experiences and expertise! As someone who was initially excited about the potential "tax savings" from routing my bonus through my LLC, this thread has been a real eye-opener. The consensus seems crystal clear: this approach would actually cost me MORE in taxes due to self-employment taxes (15.3% vs 7.65%), plus it creates significant compliance risks that could lead to IRS scrutiny and penalties. And as several people pointed out, my employer probably wouldn't even agree to this arrangement anyway. I'm particularly grateful for the suggestions about legitimate tax-advantaged alternatives. I definitely haven't maxed out my 401(k) contributions this year, so that seems like the most straightforward way to reduce my tax burden without any of the risks associated with the LLC route. It's a good reminder that when something sounds too good to be true (like magically avoiding employment taxes), it usually is. Sometimes the boring, straightforward approach really is the best one. Thanks everyone for saving me from what could have been a very expensive mistake!