How to save thousands on your taxes without cheating.

I started my LLC for Shirakaba Studio this year and I’m going to show you how I’ve set up my taxes to save money.

If you’ve spent any time as a contractor or freelancer then you understand the situation. The pay is excellent but most companies don’t take out taxes for you. This leads to enormous tax bills each year. That is the fate of freelancing.

Unfortunately, most freelancers don’t understand that they can file an LLC and start taking advantage of some additional benefits when it comes to saving on taxes.

Brett from Design Joy could have saved $40k on his taxes had he filed as an S-Corp.

.There are plenty of benefits to being taxed as an S-Corp. Here are a few of the biggest reasons:

• With an S-Corp there’s no self-employment tax.

• You can elect to be taxed as an S-Corp with your LLC.

• You get to pay yourself a salary + dividends (which are not taxes)

• You’ll save thousands of dollars each year like this.

Finally, thanks to companies like Gusto it’s easy to set up payroll and pay yourself. Here's how you can do this for yourself and some of the things I’ve learned along the way.

Step 1: Start an LLC for your business if you haven’t yet.

This is the only way to take full advantage and unlock other goodies the world has to offer.

It’s no secret that America is a capitalist society that runs on credit. Opening an LLC means you can open a business bank account. get an EIN and business credit. Companies like Legal Zoom or Tailor Brands they make is very step-by-step.

What I learned though is that an LLC does not make you exempt from self-employment tax (bummer!). From a tax perspective, the IRS treats LLCs the same as a sole proprietors. The only difference is the additional level of legal protection.

Step 2: Elect to be taxed as an S-Corp.

The only way to not pay self-employment tax is to pay yourself on payroll. This effectively makes you an employee of your own company. This also means you take a salary (that you decide on).

In addition to your salary, you also get to take dividends which are not taxed. The IRS doesn’t tell you how much you’re allowed to take but says you need to pay yourself “a reasonable salary.” So don’t think you can pay yourself $1 and pull everything out in dividends.

Most accountants follow the 60/40 rule. 60% of your income comes from salary while the other 40% comes from dividends. These can be monthly, quarterly, and transferred directly to your bank account from the business bank account.

Step 3: This only works when you’re making over $50k per year.

To take advantage of your S-Corp election you need to be making over $50k per year or it’s not going to help you out. If you’re not there yet I still recommend setting yourself up with an LLC, Business bank account, and EIN.

To pay yourself you simply will do what is called an “owner’s draw” which is a fancy term for transferring money from your business checking account into your personal account whenever you need to. Why is this better than a sole proprietorship? Because you’re only taxed on what you transfer from your business account. You’ll still have to pay employment tax (unless your state doesn’t collect them) but it’s better than being taxed for all income coming in.

Here’s another fun thing I’ve learned: You can use your business bank account to invest in the stock market. If you happen to be flushed with cash after paying yourself you can invest and grow that money in the stock market (or T-Bonds) or whatever. Pretty cool!

To recap, get your LLC set up and start paying yourself through Gusto (or another service). Gusto all the taxes out for you and you get a W2 at the end of the year which is nice. Pay yourself a 60/40 mix of salary and dividends and you’re in business!

Do you have any experience doing any of the things I mentioned above? Let me know! I’d love to hear more about your personal experiences with it all.

Until next week! Thanks for reading.

-Jimi