I run a small e-commerce store (sole prop) and my accountant mentioned an LLC might save me on taxes. But from what I've read, LLCs are pass-through by default, so where's the savings? Is it just about the S-corp election? Feels like everyone online says 'form an LLC' without explaining why. Would love to hear real experiences.
LLC Taxes
Is an LLC worth forming if tax savings are the main goal?
Short answer: not really. The LLC itself doesn't save you a dime on taxes. It's the S-corp election that can reduce self-employment tax, but that coems with payroll and admin costs.
This. I formed an LLC thinking it would magically lower my taxes. It didn't. Then I elected S-corp and saved maybe $3k/year, but I pay $800 for payroll software and another $1k for extra tax prep. Still nett positive, but not the windfall I imagined.
The real benefit of an LLC is liability protection, not taxes. If tax savings are your only goal, you might be disappointed.
Depends on your profit level. If you're clearing $80k+ net, S-corp can be worth it. Below that, the payroll and filing fees often eat the savings.
Thanks, that's helpful. I'm around $60k net right now. Sounds like S-corp might not be worth the hassle yet.
Also consider state fees. My state charges $800/year for LLC franchise tax. That's a real cost that doesn't exist for sole props.
If you're in CA, forget it. The $800 minimum franchise tax kills any small tax savings.
What Sunshine said. I'm in CA and my LLC costs me $800/year just to exist. The S-corp election saved me about $4k in SE tax, so I net maybe $2k after payroll fees. Not huge but not nothing.
Wait, you're netting $2k? That seems low. Are you factoring in the QBI deduction? S-corp shareholders can still get QBI, but the wages reduce it. It's a balancing act.
This thread is making me glad I just stayed a sole prop. I'll take the simplicity over a $2k savings any day.
But liability is real. One lawsuit and your personal assets are on the line. That's worth something even if the tax savings are marginal.
Liability isn't my main concern (I sell handmade goods, low risk). But I appreciate all the input. Sounds like I should wait until profits are higher.
Smart.Also talk to a CPA who knows your state. Generic advice online is useless for this.
One more thing: if you do elect S-corp, you have to pay yourself a 'reasonable salary.' The IRS doesn't define that clearly, and if you set it too low, you risk an audit.
And don't forget the LLC annual report fees in some states. It's death by a thousand cuts.
Honestly, at $60k net, I'd stay sole prop. Revisit when you're consistently over $100k. The The math changes.