My business partner and I own an LLC, just two of us, now successfully making solid $$ each month.
I'm wondering for myself (individual taxes), what is the best way for me to be as an entity (sole proprietor vs owning my own LLC) so that I can reduce my personal taxes the most?
I'm green when it comes to minimizing individual taxes but cannot take advantage of a 401k but I can take advantage of working from home, right? Would love advice on practical deductions for someone in my situation (partially owns a business which he is using to pay himself)!
Thank you all so much!
-Denny
LLC isn't the part that matters so much as even with an LLC you'd normally be taxed as a sole proprietor.
The important part after you create the LLC is to opt to be taxed as an s-corp. If you've had the LLC for more than 3 months, you'll have to wait for the next year (aka January a month from now) to make the election. Otherwise you can make it now.
Key good things about opting s-corp:
You can significantly reduce how much you pay in self employment tax by taking a lot of the profit as a draw rather than as w-2 income. You still need to take a reasonable salary, but if that's 60k and you are netting 100k, that's 40k that you don't have to pay SE tax on.
Downsides:
You'll now need to pay unemployment tax
If you have w-2 income from full time employment you might actually end up paying more SE tax than normal
Less flexibility on splitting up the income
Other good things to look into:
Yes you can get a 401k and should!! google solo 401k or individual 401k. These are typically free and available to you and your business partner.
401k Profit sharing (Very good to do, applicable for partnerships and owner only s corp)
Understanding your various business expense deductions like internet, phone, mileage, home office (if applicable)
Key thing on the 401k is get it set up before the end of the year. Even though you can make profit sharing contributions until the tax deadline, if the plan didn't exist on Dec 31, you'll miss out.