I’m sorry to be the bearer of bad news, but becoming an LLC will not magically prevent you from paying Self-Employment taxes. Why? Because an LLC is not a tax filing status.
Before you determine exactly which tax filing status is right for your business, we recommend you read the following Q and A:
Can I file my taxes as an LLC?
No. Though becoming an LLC may be an important step in protecting your business, it is just a legal entity, not a tax filing status.
If I can’t file my taxes as an LLC, what filing status do I use?
Well, it depends on many factors, but the good news is that you have a few options to choose from. You can either file as a Disregarded Entity Partnership, an S-Corporation, or a C-Corporation. If you don’t choose one, however, the default position is Sole Proprietor. But be careful with that one — filing as a Sole Proprietor is probably the most expensive way to file your taxes.
What happens if I have an LLC and I file as a sole proprietor?
Maybe nothing. But if you have an LLC and you file a Schedule C on the Form 1040, you’ll run a greater risk of being audited. In fact, if you make over $100k in gross revenue, you’ll be 5 times more likely to be audited than if you filed as an S-Corp. Filing as an S-Corp may even prevent you from having to pay self-employment taxes.
Sounds great! So I should file as an S-Corp, right?
Not so fast. Because there are pros and cons to every entity, there is no one-size-fits-all answer to this question. Depending on the size of your company, we may even suggest that you file as two different entities.
Ok, now I’m confused.
Don’t worry, you’re not alone. Here’s a good rule of thumb, if your business currently makes over $100k in gross revenue, we recommend you get in touch with a tax professional so they can help you determine which filing status is right for your business.