Hey, guys. Courtney Epps here with OTB Tax and I want to help you have a more relaxing and less taxing life. I’m going to share with you something today that has changed and saved my clients’ tens of thousands of dollars, probably millions at this point. I want you to understand that when you become a business owner, you can operate your business on several different levels. You can be just a sole proprietorship and you can do your tax return as a Schedule C on your personal tax return. You can be a partnership with a group of people and you can do what’s called a 1065, which is a partnership return. I don’t suggest it, and I don’t suggest being a sole proprietor either. Or, you can be considered an LLC, and so many people believe that an LLC has to do with taxes. It doesn’t.
What an LLC does is give you some options. An LLC is a limited liability company and what that does is that limits your liability. It allows you if someone were to sue you or your company, they would only be able to get what’s inside your company unless they could prove that you went outside your company and breached the corporate veil. That’s another video, but today I just want you to understand that by having an LLC, it gives you the option to treat your business as a sole proprietorship or you can treat that business as an S corporation for tax purposes. What that means is that an S corporation allows you to bypass virtually 80%, 75% to 80%, of your self-employment taxes.
As a business owner, when we make money, we get to deduct all of our expenses and from that, we have left over what’s called a net income, and that net income, you would pay not only federal and state taxes on that because it flows to your personal tax return, but if you are a sole proprietorship or a partnership, you actually have to pay self-employment taxes on that. See, as a W2 employee, 7.65% of your Social Security and Medicare, that comes from you, and then your employer matches that 7.65%. That total is 15.3%. As a business owner, you don’t have an employer, you are your employer, so you have to pay both.
Let’s just say we had $50,000 in net income. You would have to, as a sole proprietor, pay federal and state taxes, plus you would pay about $7,500 in self-employment taxes. But if you have an S corp election, so the LLC, treat it as an S corp for tax purposes, then you can bypass about 80% of that self-employment taxes. So, instead of paying $7,500, you pay more along the lines of $6,000. That’s a win-win across the board, so I definitely want you to take into account if you make more than $10,000 net income, that you go get an LLC. You treat that LLC as an S corp for tax purposes so you can have a more relaxing and less taxing life.