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If you have it as an LLC, any profits will pass through to you through your schedule C, and you will be taxed at regular income tax rates. Your accountant will
by meetingthrower 5y ago
If you have it as an LLC, any profits will pass through to you through your schedule C, and you will be taxed at regular income tax rates. Your accountant will help. But tax optimization can REALLY matter, and as a small business you have massive opportunities to very legally and ethically optimize your business and tax.
Top of mind, what you should really consider is:
a) setting up a 401K under the business to shelter some of the income tax free (you can also contribute a significant portion of profit tax free.) Vanguard and Fidelity have no cost single member LLC 401ks that are super simple to set up.
b) thinking of your strategy to invest in this business, or grow another one. Because any expenses are deductible, this is like having ~30% off any business investments courtesy of the federal government.
c) relative to a) above, is if you have a spouse, employ him / her in the business to the extent that you maximize their 401k contribution. (I did this for my spouse and even at $18K a year compounding the 401k has $300K bucks in it!) Again, a small business accountant will be super familiar with how this works.
- Serenacula 5y agoI don't think the spirit of the question was "how do I avoid paying taxes", but more along the lines of "what the hell do I do with all this money I don't need?". I would suggest giving it to charity, OP. My mother always said even poor folks should be giving at least 15% of their income to charity, but if you have more than you need, no reason not to increase that number.
- Rastonbury 5y agoBecause money is fungible, you can pay more tax or you can give more to charity. The answer is very pertinent because of this
- Clubber 5y agoSadly, many charities are borderline fraudulent. Always ask what their administration fee is. I remember getting a call on Memorial Day asking for donations to veterans. I asked what the administration fee was and he said 90%. I said, "No, I mean what do you take to process these payments and make the calls?" He repeated, "90%." I was floored. Anyway, to answer the OP's question, you need to save at least some of it. Just because you are making money now doesn't mean you will make it in the future. Plan for a life-changing event where you are unable to make money, or even worse, you are reliant on others to take care of you. Best to have something stored away, preferably an appreciating liquid asset so you can get to it fairly quickly.
- orangepurple 5y agoYou need look no further than the amount of $ given to San Francisco charities to help the homeless and actual results on the ground.
- colinmhayes 5y agoAdministration fee is less important than overall impact, which I assume is what people who worry about overhead actually care about. There are plenty of evaluators that skip worrying about overhead and get to them meat of the issue, how much does this charity help per dollar.
- remram 5y agoWhat's the difference? What portion of your dollar is neither "help" nor "overhead"?
- deleted 5y ago[deleted]
- colinmhayes 5y agoThe impact of the dollar changes depending on what you spend it on. If you want to help veterans there are tons of ways to do that ranging from mental health outreach, to political action, to just giving them money. You can figure out which organization has the most impact per dollar and donate there. Handing out money to veterans might have extremely low overhead since it can be done by a single person mailing out checks, but that doesn't mean it's the most effective way to help.
- Clubber 5y agoIf any company takes 90% for administration, it's a scam, no if's and's or but's. That's actually a net negative impact because it gives people pause when donating to charities.
- markc 5y agoAn easy solution to "what charities should I give to": https://www.givewell.org/ https://www.givewell.org/
- deleted 5y ago[deleted]
- hellbannedguy 5y ago
- dkysang 5y agoIt's unethetical to pay taxes if you're American. Have you seen what they do with that money?
- pkrotich 5y agoIt was obvious OP didn't know simple facts about taxes and income... based on his/her post. Getting that right is more important for the longterm and I think the parent was on point.
- dayvid 5y agoIt's good to donate a percent to a charity (I think charities where you personally know people working for them are best). It's also very important to make sure you have money set aside for retirement or emergencies (even if you have a surplus). You may have children, your parents may need care, your small business may be disrupted, and it's good to have something to fall-back on or use if you need a runway or to invest some money into a new business.
- dr_dshiv 5y agoSuper helpful reply, thank you.
- calchris42 5y agoSuper helpful. I didn’t know about individual 401k’s. Thank you!
- tomcam 5y agoYou in particular should also benefit greatly from a SEP IRA. Expensive to run but lets you sock away much much more.
- meetingthrower 5y agoActually Solo 401k lets you put away just as much if not more, and has a Roth option. But both are worth considering for sure.
- japhyr 5y agoWhat's expensive about running a SEP IRA? Are you referring to the fact you have to contribute to an employee's IRA as well as your own?
- tomcam 5y agoI had to jump through hoops and pay a specialized firm to administer. Maybe it no longer applies?
- 1123581321 5y agoI can’t say what happened, but SEP was always the simpler, cheaper option, nearly DIY compared to a proper 401k.
- meetingthrower 5y agoBoth are basically plug and play now with places like fidelity or vanguard. Zero admin fee for mine.
- RhysU 5y agoSeconded on no cost with at least Fidelity. They start having reporting requirements at $250K of assets. They are also something of a pain to close if you have multiple participants.
- cashsterling 5y agoThis is very solid advice. I would only add that you should consider maxing out your Roth IRA contribution every year (6k USD per year), particularly if you are young. You use post tax dollars to fund your Roth IRA, but all of the funds in your Roth IRA, including all gains, are tax free when you retire.
- ReaLNero 5y agothe GP's 14k a month salary would put them above Roth IRA income limits. The only option is a backdoor Roth IRA contribution.
- nodesocket 5y agoThanks to absurd tax laws, they won’t qualify for roth IRA. I’m in the same boat, have to look at backdoor, but does draw some heat and attention of the IRS doing back doors.
- RhysU 5y agoAFAIK, backdoors are a non-issue with the IRS so long as the paperwork is done correctly. Do, do, do read up on "pro-rata" considerations because the regular->Roth conversion of post-tax contributions is definitely not tax-free if you have any other pre-tax dollars sitting about in any IRA.
- nodesocket 5y agoI’m also a solo LLC business owner. Open up a SEP (assuming you plan on having w2 employees) else open a individual 401k (can’t have employees). Allows you to contribute significantly more to a personal retirement account. Quick back of the napkin math with a SEP you should be able to stash away around $31,000 into retirement annually assuming you pay yourself $168,000. Second, buy yourself work equipment (write offs). Buy that top of the line new MacBoom Pro and ultrawide monitor. These are business expenses and write offs, but still assets. Finally, open up a health savings account and stash as much as the limit allows (it’s not a lot), but better than nothing. Also tax free in.
- ryanjmo 5y agoThis is not good advice. If you set things up correctly you should set it up as an s-corp to maximize your tax savings. If you have an s-corp, you won’t have to pay self employment tax, which is 15% on all of your profit and all of your salary if you just stay an LLC without an s-corp election. With an s-corp you are advised to pay yourself a reasonable salary as a w2. That salary is the only thing you will need to pay that self employment tax on. That salary should be as low as you can justify. Here is info from the IRS about how to go about calculating that.. https://www.irs.gov/pub/irs-news/fs-08-25.pdf https://www.irs.gov/pub/irs-news/fs-08-25.pdf I would imagine you could easily justify $50k-$75k as your salary, but you’d have to put the time in to calculate it. If you were to do this based on $54k a month, you are saving about $90k a year on your taxes. The less you pay yourself a w2 the more you save. If you set up like this, which is the way you will save the most on your taxes, then the amount you can contribute to your retirement account, ie solo 401k for you in this situation is approximately 50% of your w2 income because how much you can contribute is tied to your salary. For a $75,000 salary that max you can contribute is $38,250. Sure feel free to put that into your Solo 401k. But that should be an after thought to saving the 15% self employment tax. By putting money into a 401k it is not tax free only tax deferred, this means you will pay taxes on it eventually. If you think you may make more in retirement than you are now it makes this deal way less sweet. I know I’m planing on making more then. Also, hiring a spouse is again a terrible idea here, because you are going to then pay 15% self employment tax between the two of you. 7.5% each. Sure if you are an LLC and didn’t take your s-corp election then this makes sense. But if you did, hiring your spouse will be an extra 15% tax on his/her salary, since all of your profits won’t have that 15% tax on them. And for what reason.. so you can put it into a tax deferred account you will need to pay taxes on eventually. The very first thing you do when you start to make real profit is to take an s-corp election. There isn’t even an argument to this. Telling the poster to do anything beyond taking a s-corp election first is doing him a huge disservice and costing him around $90k a year.
- vagab0nd 5y agoI don't think this is correct. The 15% or so self employment tax is only for the first 147k income (2022). The rest is more like 3%.