Can an LLC Save You Taxes? Exploring Scenarios

When small business owners consider forming an LLC, one of the first questions that comes up is: “Will this save me money on taxes?”

The answer? It depends.

While forming an LLC (Limited Liability Company) offers legal protections and flexibility, its impact on your taxes varies based on your income level, business structure, and how you choose to be taxed.

Here we look at different tax scenarios to help you determine whether forming an LLC can lower your tax bill—or if another approach might be better.

How an LLC is Taxed: The Basics

By default, an LLC isn’t a separate tax entity in the eyes of the IRS. Instead, it’s considered a pass-through entity, meaning business profits flow directly to the owner’s personal tax return.

However, an LLC can choose different tax treatments, which can impact how much you owe in taxes.

Default LLC Tax Treatment

• Single-Member LLCs: Taxed as a sole proprietorship by default.
• Multi-Member LLCs: Taxed as a partnership by default.

In both cases, the LLC itself doesn’t pay income taxes—profits and losses pass through to the owners, who report them on their personal tax returns.

Electing S Corporation or C Corporation Tax Status

LLC owners can elect to be taxed as an S Corporation or a C Corporation instead of using the default pass-through taxation. This can sometimes lead to tax savings, depending on income and business structure.

Scenario 1: You’re a Freelancer or Sole Proprietor Making Under $50,000

If you’re running a small business as a freelancer, consultant, or solo entrepreneur, your income is typically reported on Schedule C of your personal tax return.

Tax Considerations

• All business profits are subject to self-employment tax (15.3% for Social Security and Medicare).
• You can deduct business expenses like software, travel, and marketing.

Does an LLC Save You Money?

In this scenario, forming an LLC won’t automatically lower your taxes. Since LLCs are pass-through entities by default, your tax situation remains the same as a sole proprietor.

However, an LLC does provide legal separation between your personal and business finances, which can be useful as you grow.

Scenario 2: You’re Making $50,000–$100,000 and Looking to Reduce Taxes

Once your business income crosses $50,000+, self-employment taxes can take a bigger bite out of your earnings.

The S Corporation Election Strategy

At this level, an LLC taxed as an S Corporation (S-Corp) could provide tax savings by reducing your self-employment tax burden.

How It Works

• Instead of paying self-employment tax on all business income, you pay yourself a reasonable salary.
• Only the salary portion is subject to self-employment tax—any remaining profits are not.
• Profits beyond the salary can be distributed as dividends, which are taxed at a lower rate.

Example

Let’s say your LLC earns $80,000 in profit.

• As a sole proprietor, you’d owe self-employment tax on the entire $80,000.
• As an S-Corp, you could pay yourself a salary of $50,000 and take the remaining $30,000 as distributions—avoiding self-employment tax on that portion.

In this scenario, electing S-Corp taxation could save you thousands in taxes annually.

Scenario 3: Your Business is Scaling Past $100,000

Once your income exceeds six figures, tax planning becomes even more critical.

S-Corp Benefits Increase

• The more you earn, the more self-employment tax savings you can realize with an S-Corp election.
• You may benefit from more structured tax deductions, including retirement plan contributions.

Should You Consider a C Corporation?

At this level, some businesses explore C Corporation (C-Corp) taxation. While C-Corps face double taxation (corporate tax + dividend tax), they offer benefits like:

• Lower corporate tax rates (21%).
• More flexibility with business deductions and reinvesting profits.

For most small business owners, an S-Corp LLC makes more sense than a C-Corp. However, for larger companies or those planning to reinvest profits, a C-Corp could be worth considering.

Scenario 4: You’re Investing in Real Estate with an LLC

If you’re a real estate investor, holding rental properties in an LLC can provide liability protection—but does it save you taxes?

How Real Estate LLCs Are Taxed

• Rental income is pass-through, so it’s reported on your personal tax return.
• You can take depreciation deductions to lower taxable income.
• LLCs offer liability protection, but they don’t provide automatic tax benefits.

For real estate investors, the biggest tax advantage often comes from proper tax deductions, rather than the LLC itself.

When Does an LLC Actually Save You Taxes?

Forming an LLC won’t automatically reduce your taxes, but under the right circumstances, it can be a valuable tax strategy.

To summarize:

• For small businesses making under $50,000, an LLC provides legal protection but no immediate tax savings.
• For businesses earning $50,000–$100,000, electing S-Corp taxation can reduce self-employment taxes.
• For six-figure businesses, tax planning becomes even more important, and an S-Corp or even a C-Corp could provide benefits.
• For real estate investors, LLCs offer liability protection but don’t necessarily lower taxes.

Before making a decision, it’s always wise to consult with a tax professional to determine what’s best for your specific situation.

By choosing the right business structure and tax strategy, you can ensure that your business is not just profitable—but also tax-efficient.