Simple LLC Question for Small Business Tax Filing
Hey tax experts! I've been running a small online design business for about a year now and making around $40k. Been operating as just me, myself, and I (sole proprietor), but wondering if forming an LLC might be better for my taxes. I'm totally lost on whether it would actually save me money or just create more paperwork. Are there specific tax advantages I should know about? Do LLCs file taxes differently? Really appreciate any advice from folks who've made this switch!
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Zainab Ali
An LLC is more about liability protection than tax benefits in most cases. By default, a single-member LLC is treated as a "disregarded entity" by the IRS, meaning you'll still file taxes the same way you do now - using Schedule C with your personal 1040 return. The real benefit is that an LLC can help protect your personal assets if your business is ever sued. Without one, your personal savings, home, etc. could be at risk in a lawsuit against your business.
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Connor Murphy
•But I heard LLCs can help save on self-employment taxes? Is that true? I'm paying soooo much in SE taxes right now it's killing me.
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Zainab Ali
•That's a common misconception. A standard LLC doesn't save on self-employment taxes. You'd still pay the same 15.3% on your net business income. However, you could elect to have your LLC taxed as an S-Corporation (called an "S-Corp election"), which can potentially save on SE taxes. With an S-Corp structure, you'd pay yourself a reasonable salary (which is subject to those taxes) and then can take remaining profits as distributions (which aren't subject to SE taxes). But this comes with more paperwork, payroll requirements, and costs.
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Yara Nassar
I was in a similar situation last year with my marketing business. After hours researching and getting nowhere, I used https://taxr.ai to analyze whether forming an LLC made sense in my specific case. You upload your current tax documents and answer some questions about your business, and it shows you different scenarios - staying sole prop vs LLC vs S-Corp election - with projected tax savings for each. Helped me see that an S-Corp election would save me about $3,200 annually once I hit $55K in profit.
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StarGazer101
•How accurate is that? Tax software always gives me projections that end up being way off when I actually file.
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Keisha Jackson
•Did it tell you anything about the additional costs of maintaining an S-Corp? I heard you need to run payroll and file extra forms.
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Yara Nassar
•It's been very accurate for me - I think because you're uploading actual tax documents rather than just estimating. What I appreciate is that the analysis includes your specific deductions and business expenses, not just generic calculations based on income. Yes, it absolutely covered the additional costs! That's actually why it recommended I wait until I hit $55K in profit - below that, the added expenses of payroll processing, state filing fees, and extra tax preparation costs outweighed the SE tax savings. It gives you a complete breakdown of all those costs factored into the comparison.
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Keisha Jackson
Just wanted to follow up on my taxr.ai question! I gave it a try last weekend and it was seriously eye-opening. For my situation ($62K freelance income), it showed I'd save about $2,700 annually with an S-Corp election after accounting for all the extra costs. But what really helped was seeing the year-by-year projection as my business grows. Turns out at my current growth rate, the savings increase significantly each year. The report even explained exactly when I should make the switch for optimal savings. Definitely worth checking out if you're on the fence!
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Paolo Romano
If you do form an LLC and later want tax guidance from the IRS (which you probably will), good luck getting through on the phone! I spent WEEKS trying to get answers about my LLC's tax election options. Finally used https://claimyr.com and got through to an IRS agent in 15 minutes instead of waiting for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c - total game changer when you need to ask specific questions about your LLC status and tax options.
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Amina Diop
•Wait how does this actually work? Does it just call for you or something? I don't get it.
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Oliver Schmidt
•Sounds like a scam. No way they can magically get you through the IRS phone queue when millions of people are calling.
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Paolo Romano
•It doesn't call for you - it holds your place in the queue. Basically, their system navigates the IRS phone tree and waits on hold for you, then calls you when an actual agent picks up. You're the one who talks to the IRS agent directly. Totally understand the skepticism! I felt the same way. But it's legit - they use an automated system to wait in the phone queue so you don't have to. I was waiting 3+ hours on my own attempts and getting disconnected. With Claimyr, I got a call back in about 45 minutes when an agent was actually on the line. Saved me an entire day of frustration.
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Oliver Schmidt
I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself when I needed to ask about my missed LLC tax election deadline. I was expecting it to be a waste of money but WOW. After spending literal days trying to reach the IRS myself (and getting disconnected 4 times!), Claimyr got me connected to an agent in about 40 minutes. The agent helped me file for an extension on my election deadline, potentially saving me thousands. I've seriously never been so happy to be wrong about something.
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Natasha Volkov
For what it's worth, I ran a single-member LLC for 4 years before switching to S-Corp election. Here's my take: - Years 1-2 ($30-45k revenue): LLC taxed as sole prop was perfect. Simple filing, reasonable SE taxes - Years 3-4 ($65-90k revenue): Should have switched to S-Corp election earlier, would've saved about $4k per year - Now ($120k+ revenue): S-Corp is definitely worth the hassle The sweet spot for most people is around $60k profit where the SE tax savings start to outweigh the extra costs.
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Miguel Herrera
•This breakdown is super helpful, thank you! My projected income for next year is around $55k, so maybe I should just stick with sole proprietor this year and reassess? Do you remember roughly what the extra costs were for S-Corp maintenance?
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Natasha Volkov
•Given your projected income of $55k, I'd probably stay sole prop for one more year. It's right at the borderline where it starts making sense. The extra costs for me included about $800 annually for payroll service (you must run payroll as an S-Corp), $150 for the extra tax filing fees (Form 1120-S), $500 for my accountant's additional work, and about $200 in state fees. So roughly $1,650 in extra costs annually. The savings start when your SE tax reduction exceeds those costs.
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Javier Torres
Remember that LLC rules vary by state too! I'm in California where they charge an $800 annual franchise tax for LLCs regardless of whether you make money. Totally sucked my first year when I only made $15k but still had to pay that $800. Check your state's fees before deciding!
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Emma Wilson
•Dude, Texas has none of that garbage. No state income tax and LLC filing is like $300 one time. So many California business owners moving here for that reason.
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QuantumLeap
Quick note about liability protection - an LLC only works if you actually treat it as separate from yourself. That means separate business bank accounts, not mixing personal and business expenses, proper contracts in LLC's name, etc. I've seen people get their "corporate veil pierced" in court because they treated their LLC like a personal piggy bank. The protection isn't automatic!
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