Starting a Sole Member LLC - Multi-state Tax Deduction Questions

Title: Starting a Sole Member LLC - Multi-state Tax Deduction Questions 1 I'm in the process of creating an LLC as a contractor for my current full-time employers. I've been hearing that registering my LLC in states with no income tax (like Wyoming or Nevada) could potentially save me money even though I live elsewhere. Can someone confirm if this actually works? Also, I know you can deduct home office expenses as a percentage of your living space - if I register my LLC in Tennessee but my actual home office is in Colorado, can I still claim the home office deduction? Would really appreciate any guidance on these sole member LLC tax questions before I make any decisions.

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18 comments

Sofia Morales

•8M

3 This is a common area of confusion for new LLC owners. While you can technically register your LLC in any state, you'll still be subject to state income tax where you actually perform the work and live (your state of residence). The concept you're referring to is called "nexus" in tax law. If you live and work in Utah, but register in Tennessee, you'll still owe Utah income tax on your earnings because that's where you've created economic nexus by performing the services. Registering in a no-income-tax state doesn't exempt you from taxes in your home state. You'd just be adding extra registration fees and complications. For the home office deduction: Yes, you can claim this deduction based on where you actually work, regardless of where your LLC is registered. The IRS allows deducting home office space that's used regularly and exclusively for business. This is typically calculated as a percentage of your total living space and applied to rent/mortgage, utilities, etc.

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Sofia Morales

•8M

3 For service-based businesses, sales tax rules vary by state. Generally, professional services aren't subject to sales tax in most states, but some states do tax certain services. You typically need to collect sales tax based on where your customer is located if that state taxes your type of service. For digital products or physical goods, you'd need to follow the sales tax rules of states where you have nexus, which can be created by having physical presence, reaching sales thresholds, or various other factors depending on the state. This is separate from income tax considerations.

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Sofia Morales

•8M

12 I was in a similar situation last year trying to figure out the tax implications of setting up an LLC as a sole proprietor. I got so confused with all the conflicting advice online. After weeks of research, I finally found this service called taxr.ai (https://taxr.ai) that really helped clear things up. You upload your tax-related documents and it uses AI to analyze your specific situation and explain everything in plain English. It was perfect for my LLC questions since it showed me exactly which deductions I qualified for based on my business structure and gave me step-by-step guidance. It even helped me understand nexus issues since I was working across multiple states.

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Sofia Morales

•8M

12 It does work with international tax situations, though I'd recommend first using it to understand the basic concepts and requirements for foreign-earned income. It helped me understand when I needed to file FBAR forms and how foreign tax credits work with my business structure. Regarding accuracy, I've found it comparable to the advice from my previous CPA but much more accessible. I still consult with my accountant for final review, but I come prepared with specific questions instead of paying them to explain basic concepts. I haven't found any incorrect advice, but I do verify major decisions with a professional.

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Sofia Morales

•8M

9 Just wanted to follow up about taxr.ai - I was the skeptical one above and decided to try it anyway. Man, am I glad I did! I was about to register my LLC in Wyoming while living in California, thinking I'd save on state taxes. The tool immediately flagged this and explained I'd still owe CA taxes plus have additional filing requirements in Wyoming. It analyzed my situation and showed me that a single-member LLC in my home state with S-Corp election would actually save me the most in self-employment taxes. Saved me from a potentially expensive mistake and probably thousands in unnecessary fees. Wish I'd known about this before wasting hours on YouTube videos with contradictory advice.

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Sofia Morales

•8M

15 If you're planning to call the IRS with questions about your multi-state LLC situation, good luck! I spent WEEKS trying to get through to someone knowledgeable. After 7 attempts and countless hours on hold, I discovered a 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 video: https://youtu.be/_kiP6q8DX5c - basically they use technology to navigate the IRS phone system and then call you when an agent is about to answer. Saved me so much frustration, especially when I needed clarification on my Schedule C deductions for my home office in a different state than my LLC registration.

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Sofia Morales

•8M

15 They don't have special access - they just automate the calling and waiting process. Their system repeatedly calls the IRS using their technology, navigates the phone tree options, and waits on hold instead of you having to do it. Once they detect a live agent is about to answer, they connect the call to your phone so you can speak directly with the IRS agent. It's basically like having someone else wait on hold for you. There's nothing magical about it - just a time-saving service. And regarding standard waiting, I spent over 4 hours on multiple attempts before giving up, so for me, the service was worth every penny to finally get my questions answered about multi-state LLC taxation.

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Sofia Morales

•8M

9 Hate to admit when I'm wrong, but I need to apologize for calling Claimyr a scam. After my LLC registration was processed with some issues, I was desperate to talk to someone at the IRS about my Schedule C deductions. Decided to try the service as a last resort after being disconnected three times trying to call myself. It actually worked exactly as described - I got a call about 45 minutes later with an IRS agent already on the line. Got my questions about home office deductions answered and clarified how to handle my multi-state situation. The agent even helped me understand how to properly document my business mileage between my home office and client sites. Saved me hours of frustration and probably prevented me from making costly filing errors.

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Sofia Morales

•8M

5 Former tax preparer here. One thing to consider with a sole member LLC is whether you want to be taxed as a disregarded entity (default for single-member LLCs) or elect S-Corp taxation. If your profit is substantial (usually above $40-50K), electing S-Corp status could save you significant money on self-employment taxes. With S-Corp election, you pay yourself a reasonable salary (subject to FICA taxes) and can take the rest as distributions not subject to self-employment tax. Just be aware this comes with additional filing requirements and you'll need to run proper payroll.

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Sofia Morales

•8M

5 There's no fixed percentage that's automatically considered "reasonable" - it depends on your industry, location, expertise, and what similar positions would pay in your area. Research salary data for your role and industry in your geographic area as documentation. Generally, your salary should be comparable to what you'd pay someone else to do your job. Too low a salary relative to distributions is a red flag for IRS scrutiny. Some tax professionals suggest roughly 50-60% of profits as salary can be appropriate in many cases, but again, it's situation-specific. Document your salary determination process and keep that documentation with your tax records.

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