Single Owner LLC Taxes – Everything You Need to Know
Single-owner LLC taxes are typically taxes as a sole proprietorship. However, the owner may elect to treat the LLC as a corporation for tax purposes.3 min read
The International Revenue Service (IRS) does not recognize an LLC as its own entity for the purpose of taxes. Instead, an LLC must choose to be taxed as one of the existing business entities classified by the IRS, such as a corporation or sole proprietorship. An LLC that is owned by one single member may choose to be taxed as either a corporation, or a sole proprietorship disregarded entity.
Sole proprietorships do not offer the limited liability that many business owners want, however, they do have the benefit of being cheap and easy to form. If you are the one and only member of your business, you are unable to form a traditional LLC, but you do have the ability to form a single-member LLC. One perk of forming a single-member LLC is that it is easier to maintain than the traditional LLC formation is, and you are eligible for some of the same benefits of limited liability.
Choosing a Single-Owner LLC
Though there is not ironclad liability protection available for a single-member LLC, this business entity formation is a good option for many entrepreneurs. This formation allows you to use the “LLC” designation with your business, which can make customers or clients take you more seriously.
A single-owner LLC is also a good place to start your business if you have just purchased your first rental property or if you only have a couple of rentals. As your rental properties increase and grow with time, setting up a multi-member LLC or a multi-entity structure would be an easy expansion for your business. One of the main benefits of an LLC is the flexibility and the option to grow and expand your asset protection structure while you are increasing your wealth.
Single-Owner LLC: Taxes and Other Expenses
A single-owner LLC can choose to be treated as a corporation for tax purposes, like a traditional LLC. If you do not formally designate your business as a corporation, however, your single-owner LLC will automatically be treated as a “disregarded entity.” This disregarded entity designation means that you do not have to file a separate tax return for your LLC. Rather, you would simply continue to report your self-employment income to the IRS using a Schedule C Form. This will actually save you some money on tax preparation fees, and additionally, you do not have to deal with minimum tax fees due to operating a single-member LLC.
If you form your single-owner LLC in a state with a high minimum tax fee for a traditional LLC, you could save hundreds of dollars. Alternatively, a single-member LLC can be taxed as a corporation, but to do so, the owner of the LLC must file an IRS Form 8832, which is called the entity classification election. It is important to note that once you elect to change your LLC's tax status from a sole proprietorship to a corporation, you are unable to change it back for five years.
Saving on Taxes for Single-Owner LLCs
Many businesses can lose out on profits simply by failing to take advantage of rules the IRS has for their chosen entity. This common downfall most frequently affects single-owner LLCs. This is because these types of businesses are commonly home-based, and friends and family are employed as workers for the business. This can result in major savings through IRS deductions if the deductions are recognized and claimed properly.
The first step in ensuring that your business is maximizing its tax benefits is to understand how the tax system of the IRS works. By default, a single-owner LLC is taxed as a sole proprietorship and it is required that a Schedule C be prepared and filed with your Form 1040 Individual Income Tax Return. In the event there is net income left over on the bottom line of your Schedule C, this amount can be carried over to the first page of the 1040 Form which is then subject to your marginal income tax (20-35%), your self-employment Society Security, and also your Medicare contributions (15.3%). This allows you to save up to 50 cents on each dollar of your business income by including your deductible expenses.
If you need help with single-owner LLC taxes, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.