Are you planning to make lots of money in 2017 (realistically that is)? Of so then you need to be paying attention to your taxes. After all, no matter who's president in 2017, you will always win by minimizing your taxes.
One of the best ways solo-preneurs or professionals who are making above-average income for their field can save taxes is by operating as an LLC and choosing S-Corporation taxation. I do mean operating as an LLC (much less formal, infinitely more flexible) and not as an actual S-Corporation (much more formal, has to operate like a corporation, much less flexible).
Self-employment Tax is Not your Friend. In fact I'm sure you dread this (currently 15.3%) tax that is supposed to be building you a "guaranteed" nest egg a few decades from now (ie Medicare and Social Security). I mean wouldn't you rather have more of that money now?
S-Corp taxation reduces Self-employment Tax. Choosing S-Corp taxation allows you to keep more of your income untaxed (and out of that mythical future nest egg) and in your bank account. It does this by allowing you to allocate your business income between earned income (which is subject to Self Employment Tax) and dividends, which are not. This can add up to thousands of dollars in savings a year depending on your income!
Example #1 (sole proprietor or LLC as disregarded entity)
You earn $80,000 in net income for the year as a cake decorator. 100% of this is treated as earned income. Your Self-employment Tax bill is $12,240.
Example #2 (LLC as S-Corp)
You earn $80,000 in net income for the year as a cake decorator. Since the average cake decorator in your area only makes $50,000, you choose to take just $50,000 as earned income and the rest ($30,000) as dividends. The $30,000 in dividends is not subject to Self-employment Tax. Your Self-employment Tax bill is $7,650.
By operating as an LLC taxed as an S-Corp, you saved $4,590 in taxes. Not bad for a bit of legal work and just a bit of extra record keeping huh?
The key is above-average income. Note that you must be making above-average income in your field for this strategy to work. This is because the IRS requires that you pay yourself earned income that is "reasonable" for your work. If you don't and get audited, you could be penalized.
Interested in seeing if an LLC is right for your business? Ready to choose S-Corporation tax status? Contact me and I'd be glad to help with your legal success!