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