United States here, specifically NY state (if it makes a difference). Say we have a super small, 1-man member-managed LLC that has elected to be taxed as an S-corporation. This way, the 1-man member can take both a wage/salary (as a W2) throughout the year as well as cut herself shareholder distributions periodically, say, quarterly. The idea behind this strategy is that the total tax obligation for the member is slightly less than if it was just a standard LLC where the member was paying themselves via shareholder/member distributions.
So now, lets say in the given year the business takes in $100 in total revenue. The general allocations of that $100 is as follows:
- W2 Payroll (for the single member) -> $30
- Say there are $10 of payroll withholdings
- So the net pay to the single member is $20
- Shareholder Distributions -> $10
- State/Federal Taxes for the Business -> $25
- Operational Costs -> $15
- "Leftovers" (can be used for whatever) -> $20
It is my understanding that the single member would have to pay personal income taxes on the $20 of net payroll earnings. Furthermore, the single member would also have to pay personal income taxes on the $10 of shared distribution earnings, and so their total personal tax obligation to state/fed would be based on personal income of $30. Let's say the total personal tax obligation here (based on brackets) is $8.
It is my understanding that the business would also (of course) have its own state/federal tax obligations of (say, based on the tax bracket) $25, as noted above.
So to begin with, if anything about my understanding above is incorrect or misled, please begin by correcting me!
Assuming I'm more or less correct...
In the example above, the total taxes paid by both the single member (as personal income) and the business is $8 + $25 = $32. For the sake of this example I'll call this Total Tax Obligation.
Is there anything the member can do, either with Operational Costs or "Leftovers", to legally reduce the Total Tax Obligation of $32? Itemizing deductions, etc.? What are these strategies and how do they work at the high level?