Starting your own business? Choosing the right structure is one of your first steps. Many business owners choose to go with an LLC because of the tax benefits it can offer. LLCs are flexible in how they’re taxed, which can be helpful depending on your financial needs. They’re also often easier to manage than other business types. We’ll take you through which taxes pass through an LLC, tax benefits of LLC, how to utilize LLCs for saving taxes on W-2 income and what is form 941. Key takeaways:

LLCs can choose to file as an S Corp to avoid double taxation and save on self-employment taxes.
LLC taxation can be used to offset W-2 income.
LLC tax write-offs are ordinary and necessary business expenses that can lower your tax bill.

Table of contents

An overview of LLC taxes...Read more

Tax benefits of LLCs...Read more

How to utilize LLCs for saving taxes on W-2 income?...Read more

What is Form 941?...Read more

How does a tax write-off work for business?...Read more

An overview of LLC taxes

When it comes to which taxes pass an LLC, the structure is quite flexible. By default, the IRS doesn’t tax the LLC itself, the taxes flowing to the owners instead. This pass-through taxation is one of the key tax benefits of an LLC, helping owners avoid the double taxation that corporations face. If you’re a single-member LLC, you’ll report your business income on a Schedule C, similar to a sole proprietorship. For multi-member LLCs, you’ll file a partnership tax return. LLCs tax write-offs also add a major advantage, allowing you to deduct business expenses like office supplies, equipment and even some travel costs. You have the option to choose how your LLC is taxed. You can stick with the default pass-through taxation or opt to be taxed as an S Corporation or C Corporation if it suits your business better.

Tax benefits of LLCs

Every taxpayer thinking about starting a business should do some research about the tax benefits of LLCs. Here are five advantages to consider.

1. File as an S Corp

LLCs offer you the option to file as an S Corp, which can help you manage LLC taxes more effectively. Typically, LLCs use pass-through taxation, meaning all profits are subject to self-employment taxes. However, by electing S Corp status, you can divide your income into a "reasonable” salary and distributions. Self-employment taxes are only paid on the salary portion, while distributions are exempt from these taxes. This strategy is especially useful for LLCs making substantial profits as it is a smart way to leverage the tax advantages of LLC status.

2. Retirement accounts

LLCs can set up their own retirement accounts which can help manage LLC taxes. Popular retirement options for LLCs include SEP IRAs, Solo 401(k)s, traditional and Roth IRAs and SIMPLE IRAs. Each of these accounts allows you to make deductible contributions, reducing your taxable income. With a Solo 401(k), you can contribute up to $23,000 as an employee (or $30,500 if you're over 50), plus an additional 25% of your net earnings as the employer, up to a combined limit of $69,000 for 2024. Similarly, contributions to a SEP IRA or SIMPLE IRA are deductible, helping to lower your LLC's taxable income. These retirement accounts not only help you save for the future but also act as a tax advantage of LLCs. They provide a way to reduce or defer taxes, especially in profitable years when you have extra cash to invest.

3. Business deductions

One of the significant tax advantages of an LLC is the ability to utilize business deductions, which can help reduce LLC taxes. So, how does a tax write-off work for a business? Simply put, a tax write-off allows you to deduct certain expenses from your business income, which lowers your taxable income. For example, if your LLC spends $1,000 on office supplies and $2,000 on travel expenses, you can write off these costs. This means that instead of paying taxes on the full amount of your business income, you only pay on the reduced amount after deductions. If your LLC makes $50,000 and you deduct $3,000 in expenses, you’re taxed on $47,000. Additionally, larger purchases like equipment can be deducted through depreciation over several years. By taking advantage of these deductions, you effectively lower your business’s taxable income and overall tax burden, maximizing the tax benefits of your LLC.

Infographic entitled LLC Tax Deductions listing six tax write-offs for LLCs.

4. Qualified Business Income Deduction

A major tax advantage of an LLC is the Qualified Business Income (QBI) Deduction, which can significantly impact LLC taxation. This deduction allows you to deduct up to 20% of your qualified business income, potentially lowering your tax bill. For example, if your LLC earns $125,000 in qualified business income, you might be able to deduct $25,000, reducing your taxable income to $100,000. The QBI deduction, also known as the Section 199A deduction, applies to eligible pass-through entities like LLCs. You can claim it along with the standard or itemized deduction. However, not every business qualifies. To be eligible, your business must not be a “specified service trade or business” if your income exceeds certain thresholds. This includes professionals like lawyers, doctors, consultants and financial planners, but also fields like performing artists or farmers. For 2024, if you're a single filer with taxable income under $191,950, you can claim the full 20% deduction. If your income is between $191,950 and $241,950, you may receive a partial deduction. For joint filers, the full deduction applies if income is under $383,900, with partial deductions available for income between $383,900 and $483,900. The QBI deduction, combined with other LLC tax deductions, enhances the overall tax benefits of LLCs.

Infographic entitled 2024 QBID Limits which is used to lower LLC taxation.

5. Health insurance deduction

Business owners can also deduct health insurance premiums, which can help lower LLC taxation. If you operate an LLC, you can deduct the cost of health insurance for yourself, your spouse and your dependents from your taxable income. This also applies to other medical expenses, including vision and dental care as long as the business is profitable and you’re not eligible for a health plan through your spouse’s employer. For example, if you pay $10,000 annually for health insurance, you can deduct this amount from your LLC’s income. If your LLC earns $60,000, you’ll only pay taxes on $50,000 after the deduction. This LLC tax deduction reduces your taxable income and lowers your tax bill.

How to utilize LLCs for saving taxes on W-2 income?

Using an LLC to save on taxes from your W-2 income can be a smart move. If you have a side business or freelance work through an LLC, you can reduce your taxes by claiming business expenses. By deducting these write-offs, you lower your LLC’s taxable income, which helps reduce your overall tax bill. Additionally, if your LLC is taxed as an S Corp, you can pay yourself a salary and take the rest of the money as distributions. Distributions aren’t subject to self-employment taxes so you can save on taxes this way. Make sure to keep good records and talk to a tax professional to make the most of these benefits.

What is Form 941?

Form 941 is a tax form that employers use to report payroll taxes to the IRS every quarter. It shows how much you’ve paid in wages and how much you’ve withheld for Social Security, Medicare and federal income taxes from your employees. It also includes the employer’s share of Social Security and Medicare taxes. On this form, you’ll list the wages paid and the taxes taken out each quarter. You can also make adjustments if needed and claim any credits you qualify for, like the employee retention credit. Filing Form 941 on time is important to avoid fines. Keeping good records of wages and taxes helps ensure the form is filled out correctly and keeps you in line with tax rules.

How does a tax write-off work for business?

A tax write-off for a business works by reducing your taxable income. When you have business expenses, you can write them off, which lowers the amount of income that gets taxed. Here’s how it works: Let’s say your business earns $50,000 in a year, and you have $10,000 in expenses for things like office supplies or travel. By writing off these expenses, you reduce your taxable income from $50,000 to $40,000. This means you only pay taxes on the $40,000, not the full $50,000. Write-offs can include a variety of expenses like rent, CPA fees, vehicle repairs, business meals and shipping materials. Keeping track of all these expenses is key because the more you can write off, the less you’ll pay in taxes. It’s a way to keep more of your money while covering the costs of running your business. FlyFin’s AI can help find tax write-offs to lower your taxable income and, in turn, the amount of taxes you owe. Expert CPAs offer unlimited LLC taxes support on the app, including preparing and filing your returns.

How to file single member LLC taxes

While similar in nature, there are key differences between a sole proprietorship vs LLC. FlyFin offers an Ultimate Plan for owners looking for expert CPA support to manage taxes.

Tax Advantages Of LLCs