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Did You Miss This Little Tax Secret That Can Save Solopreneurs Money?

by Olufisayo
Published: Last Updated on
Tax Secret That Can Save Solopreneurs Money

There are always two things that solopreneurs are in short supply of… time and money for taxes. Some entrepreneurs pay their taxes quarterly and avoid this need to save up a giant chunk of money for year-end tax bills.

Others go the once a year route and fail to save or find the giant tax savings sum a spending temptation. If you run your own business, you’ve likely dipped into your tax savings here and there. Sometimes it’s all too easy to borrow your tax funds to cover personal expenses, an emergency purchase or other needs for quick business funding.

Now that you’ve likely filed your taxes (or applied for an extension), you’re feeling the hurt of this year’s tax bill. But, there’s a way for you to save yourself a couple bucks on tax payments in the future.

First, you’re going to want to file your business as an LLC. Most small businesses file as an LLC for many reasons. Not only are your personal assets protected if your company acquires debt, but it also has less guidelines and stipulations than other business structures.

In addition, one of the best advantages of filing as an LLC is that you can choose how it is treated as a taxable entity. By default, multi-owner LLCs are automatically taxed as a partnership while LLCs with a single owner are taxed like sole proprietorships. However, LLCs have the option to choose whether to be taxed as a C Corporation or S Corporation.

How LLCs are Taxed

If you have an LLC and are the sole proprietor (a single owner or “member” of the LLC), the LLC itself doesn’t have to file a tax return with the IRS nor does it have to pay taxes. Instead, it is a “pass-through” entity and the profits or losses of the LLC are reported on a Schedule C form and submitted with your personal 1040 tax return.

If there are multiple owners, then the LLC is treated as a partnership. As with a single owner, the LLC doesn’t pay taxes since the LLC owners each pay their share on their personal income tax returns (with a Schedule E form attached). This is called the “distributive share” when each of the LLC’s members share the profits and losses as determined by the LLC operating agreement.

How LLCs are Taxed as an S Corp

If an LLC is filed as an S Corp, the initial process is similar to what was mentioned above; the LLC is still a pass-through entity and income and losses are reported on the owners’ personal tax return. However, there are a few minor differences when filing:

An S Corporation files an information return (Form 1120S) in which they will report the corporation’s income, deductions, profits, losses, and tax credits for the appropriate year. Additionally, Schedule K-1 of Form 1120S is used to report each shareholder’s agreed upon share of net income or loss from an S-Corporation. Shareholder