Most businesses end up cutting into profits simply by not taking advantage of the rules the IRS has laid out for them. The most susceptible to this common downfall is the sole proprietor or single-member LLC. It’s possible to save on single member LLC taxes—you just need to know the right steps to take.
What is a Single Member LLC?
In simplest terms, a single member LLC is an LLC with only one owner. These types of businesses frequently do business from home and employ the work of friends and family. The practices described below can net huge savings through deductions outlined by the IRS, compared to operating as an unincorporated sole proprietor.
How Do Single Member LLC Taxes Work?
The first thing to understand is how the IRS tax system works. The IRS taxes your single member LLC business as a sole proprietorship which requires a Schedule C. The Schedule C is prepared and attached to your Form 1040 Individual Income Tax Return.
You report all the business income and deductible expenses each year on the Schedule C. To the extent there is any net income left on the bottom line of the Schedule C, it will be carried over to the first page of the 1040 Form subject to your marginal income tax (about 20 to 35%) and self-employment Social Security and Medicare contributions (15.3%). Therefore, you can save up to 50 cents on every dollar of business income through deductible expenses. This is the reason to keep a good and separate record of all business income and expenses from the beginning. Doing this will make it easier to prepare an accurate Schedule C each year.
Hidden Tax Deductions for Your Single Member LLC
The first thing to do is open a separate bank account for your one member LLC. This is where you deposit your business income and out of which to pay your business expenses. This will give you record of all business income and expenses for your tax records.
There are obvious deductible expenses which you will pay out of the LLC bank account such as promotional materials and postage, food and beverage at showings, cost to send, exchange or return merchandise. Most entrepreneurs utilize these clearly recognizable deductions.
However, the real savings for your company lies in the fine print – the hidden deductions. To be clear, the use of these deductions is permissible. The IRS established these rules to make tax records for home businesses simpler for both parties – you and the IRS. The not-so-obvious deductions for business expenses can save huge on costs. You can take those deductions on the Schedule C and reimburse yourself by writing checks to yourself out of the business bank account.
- If you operate your business from your home, the IRS allows a standard $1500 home-office deduction so that you don’t have to itemize it.
- The IRS allows you to reimburse yourself at a standard mileage rate of 54 cents per mile for the business use of your car without having to itemize gas, insurance, depreciation, and maintenance.
- If you use your cell phone for business as well as personal use, you can deduct that monthly charge. If share a plan with a partner, you would be able to deduct half the monthly cost from the bill.
- Any promotional events at your house or elsewhere are deductible including the cost of food, beverage and/or room rent.
- You can also deduct the subscription cost or out of pocket per issue costs for magazines applicable to your business.
- Any licensing fees to conduct your business are deductible.
- Anyone you pay to assist you is deductible as well. The IRS allows you to pay your family or children for helping you carry things for you for shows, meetings, or other public events. The added benefit of teaching kids to work for their own money also encourages good “work ethic”.
How Do I File Single Member LLC Taxes?
Franchise Tax for Delaware LLCs is due by June 1 each year the LLC is in existence. Even as a single member LLC, you are responsible for paying franchise tax. The state will add a substantial late fee of $200 to any late payments. LLC franchise tax can be paid through the Division of Corporations’ website or through defrantax.com.
Using all the tax-saving resources can really help small business net more profit. The company can reinvest it back into the company or it can be used as extra income for yourself. There is nothing wrong with saving money, especially when it’s simply by following the rules strictly.