SINGLE MEMBER LLC TAXES

Let us help you understand your Single Member LLC Tax deductions for maximum gains this year! 

single member llc

So, you’re considering starting your own business. It’s just you.

 

  • What are the options for business entity choice?

  • What filings are associated with each selection?

  • Are there any potential pitfalls?

 

With lots of questions, your first call for answers should be to Savvy & Suite.

In this situation, one option is the very popular single member limited liability company.  This entity offers various liability protections afforded by other entity choices but limits the amount of compliance filings needed to satisfy the Internal Revenue Service’s requirements.

First off, what is a single member LLC?

 

A single member LLC is an entity that has one sole member as an owner in the business. This entity typically goes through the same registration process as multimember LLCs, registering in various states.

 

This registration process often affords the entity a bit more liability protection than some looser organizations (we’ll discuss one such option later). 

What’s the difference between registering as a DBA (“doing business as”) versus forming an LLC?

 

In the grand scheme of things, the major difference is the liability associated with each. While an LLC shields an owner from potential liability, a DBA does not, implying that personal assets could be at risk.

 

Interestingly, LLCs can still use the DBA designation if they want to separate their business trade name from their registered name. Because it’s so easy to register for an LLC, it is a huge first step to eliminate this liability exposure, especially because the additional flexibility of using a DBA afterwards.

Considering choosing between an individual/sole proprietor or single member LLC? Once again, it likely comes down to your risk tolerance regarding liability protection.

 

Most often, sole proprietors are viewed as one with their business, implying their business assets and personal assets are one in the same.

 

Single member LLCS, as noted, separates the business from the individual, allowing some personal protection when needed.

For tax purposes, this entity structure serves as a disregarded entity. What is a disregarded entity, you may ask?

 

This phrase basically means that for business tax compliance purposes, it’s as though this entity does not exist; no business tax return must be filed in order to meet filing requirements. Instead, a disregarded entity is reported on your personal return on either Schedule C or E, depending on what type of activity you are engaging in.

 

Like other flow-through entities, the tax associated with the business profits from a single member LLC is calculated at this personal level.

 

While there’s no strict demarcation of single member LLC taxes from personal taxes, it’s important to realize that the profits from a single member LLC can have a tremendous impact on your personal tax situation.

Just because there isn’t business tax compliance required does not mean that it’s not important to delve into the business numbers. There are various taxes associated with this type of business structure, most notably self-employment tax.

 

Self-employment taxes are largely what they sound like; most times, wages paid to employees are taxed, with the employee contributing some towards the tax and the employer contributing the rest. Because single member LLCs technically have no employees, the government finds a workaround by taxing the entire amount of business earnings like they were wages, with a member covering both halves of the employment tax.

 

Fear not, though: one-half of your self-employment tax is deductible. Likewise, there is also the opportunity for various added deductions, including the Section 199A Qualified Business Income deduction. This deduction is great for small businesses, as it basically exempts 20% of your taxable business income from taxes.

 

This may not seem possible due to the lack of business tax return reporting, which is why it is so crucial that you surround yourself with advisors that are current on all tax laws, even relatively new ones.

 

Rest assured, we’re up to speed on the changing tax landscape and will always keep you informed of pertinent law changes or opportunities for you to better utilize additional areas of the Code.

Single member LLCs still have a large planning component involved, as their business performance directly impacts the personal return of the sole member. As such, it’s essential to remember that these profits are not taxed throughout the year and are subject to quarterly estimates in order to guess at the tax liability at year end.

 

Having a quarterly estimate plan is surely a service that can provide immediate impact, as underpayment penalties and interest are nothing to scoff at. Developing a plan with your trusted advisors at Savvy & Suite can be the difference between being completely paid in on Tax Day or being left with a stinging bill from the IRS, along with penalties and interest.

 

Since we value the personal relationship with our clients, we’ll be truly in tune with your tax circumstances and will work with you to provide the best estimate possible based on these figures and circumstances. We understand just how important it is to be right in quarterly estimate situations, as no one likes giving the government a zero percent loan for a year if you mess up your first quarter estimate.

 

Your planning objectives will come first and foremost, but we’ll have insights should you need additional advice.

Starting your own business is surely a thrilling time, but it’s important that you check off the boxes in order to protect your business. A single member LLC is a great way to gain liability protection without burdening your business with additional business tax compliance forms.

 

Because a single member LLC is a disregarded entity for tax purposes, your business’ performance will be reported on your personal income tax return. Although there is a lack of additional compliance filing, this does not absolve a member from engaging in tax planning activities, especially regarding quarterly income tax estimated payments.

 

Still have questions about the benefits of a single member LLC? Your friends at Savvy & Suite would love to talk through any situation you can come up with!