A lot of entrepreneurs form an LLC thinking it will save them taxes. It doesn’t. A single-member LLC or sole proprietorship pays self-employment tax (FICA) on every dollar of profit—a full 15.3% before you even touch federal or state income taxes. Make $100,000 in profit? You could hand over more than $15,000 in FICA alone. That’s the IRS “tip” for being self-employed.
But here’s the good news: once your business consistently nets $40,000–$50,000, the equation changes. That’s the point where an S corporation election can dramatically reduce your self-employment tax burden by allowing you to split income between reasonable payroll and distributions.
If you’ve crossed that profit threshold, it’s time to run the numbers. The savings can be substantial.
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