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How Can Opening an LLC Help You Save Taxes?

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Lesser Tax
February 16, 2025

If you have a small business or a side hustle, you might have heard about forming an LLC (Limited Liability Company). But did you know that having an LLC can actually help you save money on taxes? In this blog post, we will break it down in the simplest way possible.

What is an LLC?

An LLC, or Limited Liability Company, is a business structure that protects your personal assets from business debts and liabilities. Think of it like a safety shield that separates your personal money from your business money.

Example: Let’s say you sell homemade candles and someone sues your business because they claim a candle caused damage. If you have an LLC, only the business assets are at risk, not your personal savings or house.

But an LLC doesn’t just protect your personal assets. It also provides tax benefits that can help you keep more of your hard-earned money.

How Does an LLC Save You Money on Taxes?

Here are the top ways an LLC can reduce your tax burden:

1. Avoiding Double Taxation

If you operate as a corporation (C-Corp), your business profits are taxed twice:

  1. Corporate Tax - The company pays taxes on its income.

  2. Personal Tax - When the company distributes profits to you as an owner (dividends), you pay taxes again on your personal tax return.

With an LLC, you avoid this double taxation. LLCs are typically taxed as pass-through entities, meaning the income passes directly to you, the owner, and is taxed only once on your personal tax return.

2. Deducting Business Expenses

One of the biggest advantages of having an LLC is that you can deduct business expenses before paying taxes. This means you can lower your taxable income by subtracting necessary expenses like:

  • Office rent

  • Internet and phone bills

  • Marketing costs (advertising, website fees, etc.)

  • Travel and meals for business purposes

  • Home office deduction (if you work from home)

Example: Imagine Alex is a freelance graphic designer who made $50,000 last year. Without an LLC, Alex pays taxes on the full $50,000. But after forming an LLC, Alex deducts $10,000 in expenses, including:

  • $3,000 for a new computer and software

  • $2,000 for home office rent

  • $1,500 for marketing and advertising

  • $1,500 for business travel and client meetings

  • $2,000 for internet, phone, and other work-related expenses

Now, Alex's taxable income is reduced to $40,000, which means he pays taxes on a lower amount and saves money!

3. Self-Employment Tax Savings

If you are self-employed and don’t have an LLC, you have to pay 15.3% in self-employment taxes (Social Security & Medicare) on ALL your income. But with an LLC, you can elect S-Corp status and legally reduce these taxes.

How it Works:

  • If you run an LLC as a sole proprietor, you pay self-employment tax on 100% of your profit.

  • But if you choose to tax your LLC as an S-Corp, you pay yourself a reasonable salary, and only that salary is subject to self-employment tax. The rest of the income is treated as dividends, which are taxed at a lower rate.

Example: Let’s say Emma earns $100,000 from her business.

  • As a sole proprietor, she pays 15.3% self-employment tax on the full $100,000.

  • If Emma’s LLC elects S-Corp status and she takes a $50,000 salary, she only pays self-employment tax on that $50,000 salary, saving thousands in taxes!

4. More Tax Deduction Opportunities

When you have an LLC, you can access additional tax benefits, such as:

  • Health Insurance Deduction: If you pay for your own health insurance, you may be able to deduct 100% of the premiums.

  • Retirement Plan Contributions: You can contribute more money to tax-advantaged retirement accounts like a Solo 401(k) or SEP IRA, reducing taxable income.

  • Qualified Business Income (QBI) Deduction: Under the IRS 20% pass-through deduction, LLC owners can deduct up to 20% of their business income, reducing their tax bill further.

Example: If Alex (our graphic designer) makes $40,000 after deductions, they may qualify for a $8,000 QBI deduction (20% of $40,000), which means they only pay tax on $32,000 instead of $40,000!

What About State Taxes?

Every state has different rules for taxing LLCs. Some states charge an annual LLC fee (ranging from $50 to $500), while others have franchise taxes based on revenue.

For Example:

  • California state imposes an $800 annual LLC franchise tax fee, regardless of income.

  • If an LLC’s annual revenue exceeds $250,000, additional LLC fees apply, ranging from $900 to $11,790.

  • California LLC owners still benefit from pass-through taxation and can claim business deductions to reduce taxable income.

To check LLC tax rules in your state, visit:

How Lesser Tax Can Help You Save More Money

At Lesser Tax, we help small business owners and freelancers maximize their tax savings through smart LLC structuring. Here’s how we can assist:

  1. LLC Formation Assistance – We guide you in setting up an LLC correctly.

  2. Tax Strategy Planning – We analyze your business income to reduce self-employment taxes.

  3. Quarterly Tax Estimates – Avoid IRS penalties by planning ahead.

  4. Maximizing Deductions – We ensure you claim every possible deduction.

Final Thoughts

Forming an LLC is a smart move if you want to protect your personal assets and save money on taxes. By avoiding double taxation, claiming business deductions, and reducing self-employment taxes, you can keep more of your hard-earned money.

If you’re ready to start an LLC or need tax-saving advice, contact Lesser Tax today for expert guidance!