I'm working as a contractor for a couple people though I haven't formally formed my own business yet.

Is it possible to reduce my personal income tax while having the money go to the business?

Ex: I owe money on my student loans, under the SAVE plan if I reduce my income down to 50k I will only owe about 150/month. I would plan to extend that out to 25 years and then reach loan forgiveness deadline. I would invest the rest of the money into the business.

If I ever needed money for something I would momentarily increase my salary for the given time.

  • Yes I am in the US.
    – maxical
    Dec 8, 2023 at 8:12
  • 1
    The duplicate question talks about multiple countries, but my answer there is specific to the US and answers your question as well. LLC's are generally pass-through, so the tax entity you are asking about has to be a corporation (C-Corp, specifically).
    – littleadv
    Dec 8, 2023 at 8:17
  • If the money is entirely invested in expanding the business it's not taxable though? I feel your answer doesn't really address the issue well enough.
    – maxical
    Dec 8, 2023 at 8:19
  • 6
    It does, that's called "retained earnings". If you can show that the money is really used to expand the business, and not just to hold it there and not distribute, then there's no retained earnings tax, but you'll need a tax adviser for that. You'll still have to deal with double taxation.
    – littleadv
    Dec 8, 2023 at 8:25

1 Answer 1


The question was reopened so I'll rewrite my answer tailored more to this specific use case.

First of all - LLC is a legal entity, what you're looking for is a tax entity. It can be an LLC, or it can be a corporation, but to separate the income of the entity from your personal individual income it has to be taxed as a corporation, and more specifically - Sub-chapter C corporation (commonly referred to as C-Corp).

Sub-Chapter C completely separates corporate income from the shareholders, and basically allows doing what you're asking for.

However, the C-Corps are required to pay income tax on the corporate level, and then to distribute profits to shareholders which will then be taxed again at the individual shareholder level as dividends (what is called "double taxation"). In addition, employees of the company, including owners, are required to be paid a reasonable salary (what is "reasonable" depends on the circumstances and you need to talk to a licensed tax adviser to determine that).

Last but not least, the profits not distributed to shareholders have to be used to advance the business. Otherwise, above a certain threshold (250K, IIRC), your corporation will get hit with an additional "retained earnings" tax which is specifically designed to deter this kind of behavior.

If I ever needed money for something I would momentarily increase my salary for the given time

This is the problematic part: if you momentarily increase your salary without any changes to what you actually do, does it mean your salary before increase was not the "right" one? Or the increase was bogus and you should have withdrawn dividends? Or the fact that the company can on a whim use its fund to play with your salary means it's not actually investing them in the business? Generally the IRS will push to the lowest possible "reasonable" salary for C-Corps (which is different from S-Corps, where they want the highest possible). This is because what you don't withdraw as a salary - you withdraw as dividends, which get double-taxed.

You're not the first and not the last trying to use entities to shield personal income, and there are a lot of laws and rules to deter that. So I suggest talking to a license tax adviser (EA/CPA licensed in your state).

C-Corps are generally very inefficient, tax-wise, for small businesses with small amount of shareholders. Which is why Sub-Chapter S was created (S stands for "Small business"). But S-Corps don't separate income from shareholders.

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