What’s the point of my LLC for taxes and write-offs?

Seeking Advice
1

I’m a 1099 contractor in sales and have been doing this for a while. Everyone told me to start an LLC, so I did, just to keep up.

Now, I’m wondering if it’s actually helping me save on taxes. My CPA has never said, “You can’t write this off because it’s not under your LLC.” I’m young and still learning, but I don’t see the tax savings.

For next year, should I open a business account tied to my LLC? Or should I keep doing everything through my personal card? It’s worked fine so far, but if I’m paying upkeep fees for the LLC, shouldn’t I actually use it for something?

2

It doesn’t make a difference for taxes.

3

The LLC protects your personal stuff if something goes wrong with your business.

4

Zain said:
The LLC protects your personal stuff if something goes wrong with your business.

That’s only true if you’re not using your personal card for business.

5

As a CPA, I can tell you there’s no special deductions you get just by having an LLC versus being a 1099 contractor. Tax-wise, there’s no difference.

People usually set up an LLC for liability protection, assuming they treat it as a separate entity and don’t mix personal and business finances.

If you ever decide to switch to an S-corp, having an LLC already in place makes it easier. Otherwise, you’d have to form an LLC first. Also, most states charge a pretty low annual fee for an LLC.

6

@Gale
Good breakdown.

7

@Gale
I think the S-corp switch makes sense around $60,000 in yearly profit, right?

8

Skylar said:
@Gale
I think the S-corp switch makes sense around $60,000 in yearly profit, right?

Not $60k. What matters is profit, not income, and there’s a lot more to consider like payroll taxes, QBI deductions, and compliance costs.

9

@Gale
This is super helpful. I hadn’t even considered the QBI deduction impact.

10

Finch said:
@Gale
This is super helpful. I hadn’t even considered the QBI deduction impact.

Thanks! It’s tricky. I use a spreadsheet to compare scenarios for clients. It’s easier to plug numbers in than manually figure it out every time.

11

@Gale
That’s a smart way to handle it. Must save you a ton of time.

12

Skylar said:
@Gale
I think the S-corp switch makes sense around $60,000 in yearly profit, right?

So is it more about the tax savings after a reasonable salary?

13

Finch said:

Skylar said:
@Gale
I think the S-corp switch makes sense around $60,000 in yearly profit, right?

So is it more about the tax savings after a reasonable salary?

Check my earlier comment. $60k is way too low for when an S-corp starts being worth it.

14

You could write off the cost of forming the LLC in the year you started it. After that, it’s not helping you with taxes.

The LLC mainly gives you legal protection, though that depends on how it was set up and how you run the business. Make sure to separate your business and personal finances—different accounts, credit cards, and so on. Pay yourself by transferring money from the business account to your personal one.

15

An LLC is supposed to be separate from you. If you mix personal and business stuff, it loses that separation. For taxes, it might help with benefits or credits, so ask your CPA about those.

16

The LLC protects your personal assets. Each state has its own rules, though. Keep a separate bank account for the business, and it’s fine to link it to your personal account for transfers.

17

I don’t see how it helps me save tax dollars.

It doesn’t help.

My CPA has never said, “You can’t write this expense off because you don’t file through your LLC.”

Good! Sounds like you’ve got a decent CPA. If they ever said that, I’d be worried.

18

An LLC doesn’t save you taxes. As a single-member LLC, it’s treated the same as being a sole proprietor. You can still deduct business expenses, but you don’t need an LLC for that. The LLC helps with liability, though. Having a business account can keep things organized, but it’s not required.

19

@Thorne
You should absolutely have a business account if you want the LLC to protect you legally.

20

For most single-member LLCs, there’s no real benefit aside from making an S-corp election easier. Many people mess up the liability protection by mixing personal and business finances, so it ends up useless. It can offer privacy in some states, but that’s about it.