LLC Self-Employment Tax: Rules for Single-Member LLCs

Single-member LLCs must pay a self-employment tax along with their standard tax on gross income. In fact, 92.35% of net earnings from self-employment, or practically all of the LLC owner’s income is taxed.

The reason single-member LLC owners are required to pay self-employment taxes is because earnings aren’t considered a salary. By default, earning are classified as self-employment earnings. Thus, the LLC owner is taxed like a sole proprietor. Today, we’ll discuss this self-employment tax in further detail, including ways to reduce its overall negative effect on your tax bill.

Where Does the Self-Employment Tax Go?

At this point, you may be wondering how this tax is divided and where does it go. Here is a quick breakdown:

  • 12.4% of the tax goes towards Social Security.
  • 2.9% of the tax goes towards Medicare.
  • 0.9% is added towards Medicare if your income is over $250,000 (married and filing jointly). This income threshold is reduced to $200,000 if you’re filing as single.

Can I Avoid LLC Self-Employment Tax?

As a single-member LLC there is no way to avoid paying the self-employment tax. It comes with the territory. HOWEVER ... There are some things you can consider to lower the total amount you owe Uncle Sam. Here are two ideas to consider:

  • Remember you can deduct up to half of the self-employment taxes you pay as a business expense. Thus, if you paid $5,000 in self-employment taxes, up to $2,500 can be marked as a business expense. This can in turn, reduce your adjusted gross income.
  • Note how passive income is treated differently. Passive income isn’t subject to self-employment taxation. However, the term “passive” is very narrowly defined by the IRS. Passive income results from an LLC in which you don’t materially participate in its business activities. This is extremely rare. The IRS also narrowly defines passive income as income derived from rental activity. We’ve helped several clients invest in real estate in connection with a traditional LLC and their income is considered passive. These clients not only enjoy the liability protection of an LLC, but their rental income escapes self-employment taxes. However, they’re still required to report any rental property income on Schedule E, Supplemental Income and Loss.

Don’t Be Intimidated About Single Member LLC Self-Employment Tax

As you can see, the self-employment tax is something all single-member LLC owners should consider when structuring their LLC. Nearly 100% of profits from the business are subject to self-employment taxes. However, don’t let this tax overshadow the protection and otherwise simpler taxation a traditional LLC provides compared to corporations or sole proprietorships. We can help set up your LLC in a way that retains both tax simplicity and protection. Call us today at [GLOBAL VAR=phone-number] for a consultation.

Last Updated: 
April 17, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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