What are the tax Benefits of an LLC for my side hustle in 2025?

An LLC by itself doesn't change your tax situation - it's just a liability protection. As a single-member LLC, you'd still file Schedule C and pay the same self-employment taxes. The potential tax benefit comes when you elect S-Corp status (which you can do with your LLC). Once you make that election, you can split your income between salary and distributions. You pay self-employment taxes (15.3%) on your salary but not on distributions. This can save you money, but there are considerations. You'd need to pay yourself a "reasonable salary" first (which means running payroll, filing quarterly payroll taxes, etc.). The IRS doesn't want you taking all distributions to avoid SE tax. Generally, S-Corp starts making sense when you're netting $40,000+ consistently. Your deductions wouldn't change - home office, software, equipment are all deductible either way. The main difference is how the income gets taxed, not the expenses.

I was in exactly your position last year! After spinning my wheels trying to figure out the LLC vs S-Corp stuff, I ended up using taxr.ai (https://taxr.ai) to analyze my situation. You upload your tax documents and it shows you the actual $ difference between different business structures in your specific case. Turns out for my photography side hustle ($25k/year), staying as a sole prop was better until I hit about $45k in profits. The LLC with S-Corp only made sense after factoring in the extra costs of payroll and filings. The tool showed me I'd actually LOSE money with an S-Corp at my income level. What I really liked was that it showed me deductions I was missing - like partial internet bills and cell phone costs that related to my business that I wasn't tracking properly.

Wanted to follow up - I tried taxr.ai after seeing the recommendation here. I was on the fence about forming an LLC for my Etsy business, and the analysis showed it would cost me about $1,200 more in accounting and filing fees than I'd save at my current income level ($18K/year). It showed that the break-even point would be around $38K in profit for my situation. The report even broke down exactly what I'm missing in deductions (about $3,200 worth!). I had no idea I could partially deduct my internet and cell phone since I use them for business listings and customer communications. Biggest eye-opener was seeing how much I'd save by tracking mileage to craft stores and post office runs. Definitely going to use their deduction tracker going forward.

If you're trying to get actual tax advice about LLCs and S-corps, good luck getting through to the IRS! I spent 3 weeks trying to talk to someone about my similar situation (freelance coding). After waiting on hold for over 2 hours twice, I gave up and tried Claimyr (https://claimyr.com) - they got me connected to an IRS agent in under 20 minutes. The agent walked me through exactly what forms I'd need for an LLC with S-corp election and the filing deadlines. Saved me from making a costly mistake on my estimated tax payments too. You can see how it works here: https://youtu.be/_kiP6q8DX5c Seriously, the IRS actually has helpful people if you can just get through to them!

I need to eat some crow here. After calling BS on Claimyr, I decided to try it myself since I've been trying to reach the IRS about my pass-through entity election for WEEKS. Got connected to an IRS business tax specialist in about 15 minutes who walked through everything about converting my LLC to S-corp status. They even emailed me the exact forms I needed and told me which deadlines applied to my situation. Turns out you need to file Form 2553 within 2 months and 15 days after the beginning of the tax year or after forming your LLC. The agent also explained that I'd need to start running payroll and doing quarterly 941s, but gave me resources for small business payroll options that wouldn't break the bank. Definitely worth it for actual clear answers from the source.

One thing nobody's mentioned is state taxes and fees. In California, LLCs pay a minimum $800 annual tax regardless of profit, which would wipe out any federal tax benefits for a small side hustle. But in Wyoming or Delaware, the fees are minimal. Also consider liability protection. LLC protects your personal assets if someone sues your business. Graphic design might seem low risk, but if you accidentally use copyrighted material or a client claims your design caused them financial harm, that protection matters.

Just remember the QBI deduction (Qualified Business Income) works for sole props and LLCs alike - you get up to 20% deduction on your business income regardless. So that big tax benefit applies either way!