Single-Member LLC Taxes: Everything You Need to Know
When it comes to single-member LLC taxes, you can utilize several deductions so you don't need to itemize.4 min read
2. Single-Member LLC Pros
3. How to Save on Taxes for Single-Member LLCs
4. Hidden Deductions for Your Single-Member LLC
5. Single-Member LLC Cons
6. Single-Member LLC Tax ID Numbers and W-9 Forms
7. How a Single-Member LLC Is Taxed
8. How to Form a Single-Member LLC
When it comes to single-member LLC taxes, you can utilize several deductions so you don't need to itemize.
What Is a Single-Member Limited Liability Company?
A limited liability company (LLC) that only has one owner is known as a single-member limited liability company (SMLLC). As an LLC, the SMLLC has the same pros and cons as regular LLCs. If you are the only owner of your business, you can't create a regular LLC, but you can form an SMLLC.
Single-Member LLC Pros
There are several benefits when it comes to forming an SMLLC.
- Minimal regulatory compliance requirements: To set up an SMLLC, you only need to draw up articles of incorporation, file the papers with the secretary of state's office, and pay a fee.
- Taxed as a corporation: You can elect to have your SMLLC taxed as a corporation. If you disregard this option, you are treated as a disregarded entity and report your self-employment income on Schedule C. This helps you save on tax preparation fees and is beneficial if you are in a state with a high minimum tax fee for regular LLCs.
- Limited liability protection: Although not as strong as it is for regular LLCs, limited liability protection for SMLLCs means you have protection for business debts. You should create an operating agreement that determines how the LLC functions.
How to Save on Taxes for Single-Member LLCs
Some businesses cut into their profits because they don't know about tax advantages available by the IRS. If your SMLLC does business from home and employs friends and family, you can realize savings through IRS deductions.
Hidden Deductions for Your Single-Member LLC
When you establish an SMLLC, you should open a separate bank account for income and expenses. That way you can keep track of identifiable deductions. However, the IRS has established hidden permissible deductions so you don't have to itemize. For instance:
- Deduct the home office. If you operate your business from home, you can deduct $1,500.
- Reimburse mileage. For business use of your car, reimburse 54 cents per mile.
- Deduct monthly cell phone line. If you use your cell phone for business, deduct the cost.
- Deduct licensing fees and money paid to those helping you with shows and meetings.
Single-Member LLC Cons
Just as there are pros when forming an SMLLC, there are also cons.
- Time-consuming recordkeeping: Make sure you have proper documents in place, and this includes an operating agreement. Without this document, you run the risk of someone filing a lawsuit and claiming that your company is a sham. The judge must see an operating agreement to determine the case, and you might be liable for business debts.
- Lack of liability protection: Some courts state that an SMLLC is not a separate entity and cannot protect the assets of the LLC from creditors. To avoid this, you can create a two-member LLC or set up a holding or parent company to own your other LLCs.
Single-Member LLC Tax ID Numbers and W-9 Forms
Most companies need an Employer ID Number (EIN). To apply for one, you must file Form SS-4 either online or over the phone. You receive the EIN almost instantaneously. You need an EIN to report employment taxes, which include federal income, unemployment, and FICA. If you pay excise taxes, these are also paid using the EIN.
If you are an independent contractor as an SMLLC owner, you may have a Form W-9 for taxes. This form verifies the business tax ID for the Form 1099-MISC similarly to a W-2 for employees. Use your tax ID and not the LLC's EIN to complete the form.
How a Single-Member LLC Is Taxed
There are several types of federal and state taxes applicable for SMLLCs. Other types of businesses pay these taxes, but SMLLCs pay them differently.
- Federal income tax: Since LLCs aren't taxing entities, the IRS states that SMLLCs are taxed as sole proprietors and report business income taxes on Schedule C.
- Self-employment tax: SMLLC owners are considered self-employed and must pay self-employment taxes annually.
How to Form a Single-Member LLC
To establish an SMLLC, go to the state's department of state website to locate information on the entire process. There you can find information on articles of organization and where to pay a filing fee. Afterward, you should prepare an operating agreement, which signals how you plan to run the business.
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