So I finally filed the paperwork for my LLC (solo owner, no employees) and my buddy keeps telling me I'm going to save a fortune on taxes. I get the liability part, but what actual tax advantages are there for a one-person LLC? Seems like I still pay self-employment tax on everything. Am I missing something or did I just waste $200?
Taxes
Are there any real tax advantages for a one-person LLC?
You didn't waste the money, but your buddy is probably overselling it. By deefault a single-member LLC is a disregarded entity, so you're taxed like a sole prop. The real perks usually kick in when you elect S-corp status, and that's a whole different can of worms.
S-corp election is the big one. You can take a "reasonable salary" and then distributions aren't subject to self-employment tax. But you have to run payroll for yourself and file extra forms. For a lot of tiny businesses the savings are eaten by accounting fees.
My accountant told me the same thing. I looked into it and between the payroll service, the 1120-S, and the state fees it wasn't worth it until I was clearing maybe 80k profit. YMMV.
Also depends on your state. Some states hit LLCs with franchise taxes or annual fees that make the whole thing more expensive than a plain sole prop. Check that before you get too excited
Yeah the S-corp thing keeps coming up. My profit is nowhere near 80k right now so maybe I file this under "future me problem." Appreciate the reality check though.
One thing that does exst regardless of S-corp: if you have a business, certain deductions are cleaner—home office, mileage, equipment. But you can do most of that as a sole prop too. The LLC itself isn't some magic tax shield.
Also if you're a single member LLC you might be able to open a solo 401k, which can be a decent retirement/tax deferral tool. Not an "LLC" advantage per se, but self-employed people often overlook it.
lol your buddy just wants you to feel good about the $200. honestly the liability separation and looking professional are the main wins at your size.