We are going to talk about just one way (there are many others ) you can cut , maybe even slash, taxes by using an LLC . For years, many accountants have recommended using an S corporation to reduce the 15.3% FICA or self employment tax. (Note that I said, reduce and not eliminate) Some people have been able to trim their FICA taxes by up to 50%.
Let me explain how this applies to an LLC. The standard or default form of taxation for the LLC members is partnership taxation and the reduction in FICA taxes was not available, in most cases, to the members of an LLC for earned income.
Then in 1997, new IRS regulations came into being which allowed the owners of business entities like LLC’s to choose the tax treatment they desired. These regulations were known as “Check-The-Box” regulations and are found in Income Tax Regulations §§ 301.7701-1 through 301.7701-3. The form for making the election is IRS Form 8832.
The change in the law provides several different options to entities such as an LLC. One of these options is to allow a business operated as an LLC to elect S corporation tax status which provides the opportunity to reduce FICA taxes. So a business person can form an LLC and then make the election to be taxed as an S corporation by filing IRS Form 2553.
Since both the S corporation and the LLC provide asset protection to the shareholders or members, an LLC which elects tax treatment similar to the S corporation, may be an attractive choice to review with your accountant or tax advisor. You get limited liability protection, basic partnership taxation, with a few exceptions, the chance to reduce FICA taxes for the individual members and the opportunity to operate with less formal legal requirements than a corporation.
By Attorney Robert Montgomery
The tax of a Limited Liability Companies is like partnerships or corporations. Members of this company are not usually held personally responsible for Company’s amount of outstanding or obligations.