One question looms on the minds of many freelancers and small business owners.
Under the new tax laws, should I become an LLC?
The answer is an unequivocal yes.
It goes without saying that establishing your business as an LLC is a win-win. Doing so affords you liability protection, deal certainty, and legitimacy in the eyes of your clients or customers.
What is lesser known, however, is why doing so has become even more important after the passing of the Republican Tax Plan. Here’s an overview of how you will benefit by transitioning to an LLC, and why this matters to companies of all sizes – not merely large, profit-heavy corporations.
Major Savings for Business Owners
Under the new federal Tax Plan, if you run your business as an LLC, you can get a 20% tax break on all profit that comes into your company. In other words, if your business makes $100,000 next year, you will only be taxed on $80,000. This would mean thousands of dollars in tax savings!
That deduction is available to all LLC business owners if their taxable income is less than $315,000 if married or $157,500 if single. Even then, the 20% deduction phases out gradually till income reaches $415,000 if married or $207,500 if single.
W-2 Employees vs Joe Contractor LLC
While Americans who make most of their money from wages and salaries can anticipate a measly 1.5% after-tax income increase, owners of LLCs can expect a boost approximately three-times as large.
Put another way, Eric the Electrician would wage a much bigger tax cut as Eric the Electrician LLC than as an employee of a property management firm. Likewise, Grace the Graphic Designer would pay less in taxes as a consultant than as a salaried employee – even if she does the exact same work for the exact same pay.
This provides an interesting opportunity for any W-2 employees who have the flexibility to be treated as freelance independent contractors. Consider the following example: Joe Contractor is a writer employed as a W-2 employee by an online newspaper making $100,000 per year. As an employee, he is taxed on the full $100,000 he is paid each year. However, if his employer agrees, Joe Contractor could instead set up a new LLC (Joe Contractor LLC) and be paid by the the newspaper through the new LLC as an independent contractor (or freelance writer), rather than as a W-2 employee. This would mean that Joe Contractor would be able to write off 20% of the income his LLC receives from the newspaper (i.e. Joe would be taxed on $80,000 instead of $100,000)!
This was designed as a way for small businesses to stay competitive with large corporations, who will receive a cushy tax cut of their own.
The new tax bill is complex and still evolving as more tax and law experts consume the 1000+ page document. If you have a lot of time and caffeine, you can have it broken down piece by piece with this helpful Forbes article. It’s also always advisable to discuss its effects on your particular situation with a Certified Public Accountant; every business is different! BetterLegal does not guarantee that the above summary and tax consequences will apply to you.
If you’d like to take advantage of the new tax benefits for your business as an LLC, there’s no better time than now. Complete the entire process for LLC formation online in less than 15 minutes with BetterLegal.