As a single-member LLC or sole proprietor, there are a few ways to maximize tax savings and reduce your tax liability. In this article, we’ll consider business structure, quarterly estimated tax payments, and common tax deductions and credits small business owners, just like you, could take advantage of.
Choose the Right Business Structure
As a sole proprietor or a single-member LLC, who has not elected to be treated as an S-Corp, self-employment income is reported using Schedule C (Profit or Loss from Business), which is attached to your Form 1040 (U.S. Individual Income Tax Return). In addition to income tax, you’ll owe self-employment tax (15.3% for Social Security and Medicare) on your net earnings (gross income minus business expenses).
If your business is an LLC, considering electing to be treated as an S Corp could potentially reduce your tax liability. By paying yourself a reasonable salary and taking additional profits as distributions, you can save on Social Security and Medicare taxes. There are tax advantages as well as some drawbacks so it’s important to speak to a tax professional to see if electing to be treated as an S-Corp is right for you.
Estimated Quarterly Taxes
Making quarterly estimated tax payments may also help minimize the impact. If you expect to owe $1,000 or more in taxes you will generally need to pay estimated taxes throughout the year. This applies to individuals, sole proprietors, partners, and S corporation shareholders. These can be made quarterly (due April, June, September, and January). When you make quarterly estimated tax payments throught the year, you’re able to:
avoid penalties related to underpayment
avoid an unexpected tax bill for not paying taxes on income earned all year long
Help minimize any tax liability that would have been owed had no estimated payments being made. For example, if your tax liability was $5,000 but you made estimated tax payments of $4,000, your outstanding tax liability is only $1000 as opposed to the full $5000. If you would have made estimated tax payment totalling $5000, you would have no outstanding tax liability in this case. If you would have made estimated tax payments totalling $6000, you would have received a refund of $1000 for overpayment.
Quarterly estimated tax payments are exactly that, estimates, working with a tax professional may help nail down a more accurate estimate, however, a good rule of thumb is to set aside approximately 25-30% of your taxalbe income as savings for estimated tax payments. Use this link to process your estimated tax payments.
In addition to considering your business structure and its tax implications, and making quarterly estimated tax payments, there are many tax deductions and credits you could take advantage of to reduce your tax liability. Tax deductions reduce the total taxable income of your business, which in turn lowers the amount of tax you owe. The IRS allows businesses to deduct a wide range of expenses, as long as they are considered ordinary, necessary, and directly related to the operation of the business. We’ve comprised a list of 25+ deductions and credits you may be eligible for!