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I read this article http://www.watsoncpagroup.com/kb/How-does-an-LLC-or-S-Corps-income-affect-my-taxes_73.html but still can get it. My scenario:

  • I work for a company full time and earn (let's say) 85k.

  • On a side I want to open LLC in PA to work on my side projects during my free time. Let's say I will earn 1k while doing work for my LLC.

  • If I register as Single-member LLCs taxes as sole proprietorships. Also there is an option to elect S-Corp. (not sure if it is better for my situation.)

Before LLC all I have to pay is Income Tax on 85k ~ 25%.

With LLC now, there will be additional Self-employee tax ~ 15.3%. So my total tax will be whooping 40.3%. The thing I don't get is will this tax be applied only to earnings from LLC - 1k or total income which is 86k ?

  • 4
    It would be good if you could include a country tag for the tax laws in that country, however, in general you would only pay self-employment tax on income earned from self-employment. – Victor Feb 16 '14 at 1:52
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SMLLC is disregarded in the US for tax purposes, so whether you operate under LLC or as a self proprietor (i.e.: without any legal entity other that your own person) - it doesn't matter. Some States have additional requirements for LLC - check PA tax laws on that. In CA for example, LLC on its own costs $800/year just to exist.

Your $1K will be applied towards your total income whether you're operating as LLC or not and will be taxed by the US Government in exactly the same fashion (unless you elect to treat your LLC as an S-Corp, but for $1k it is definitely not advised).

  • Hi, thanks for reply. I found irs.gov/Businesses/Small-Businesses-&-Self-Employed/… and it says it is disregarded "... but as a separate entity for purposes of employment tax and certain excise taxes". I'm assuming "employment tax" is another name for self-employment tax. So I would have to pay SE tax on 1k only right? Not 86k? The fact that it is all bundled together confuses me. How does IRS know that all 86k didn't come form LLC/self-employment, and thus applying SE tax on the whole sum. – user13104 Feb 17 '14 at 15:51
  • No, employment taxes are taxes you have to pay when you're an employer. If you don't have employees - these are not relevant for you (you can yourself be an employee if your LLC - but you don't have to, unless its an S-Corp). – littleadv Feb 17 '14 at 18:40
  • You would have SE tax on the 1K whether it is under LLC or not, as I said. Since you were self employed and earned 1K - you'll pay self-employment tax. I don't understand why would you think that not having an entity somehow makes it untaxable. The 85K were earned as employee, so you don't pay SE taxes on them - they were withheld already and appear as FICA (SS+Medicare) on your W2. By matching to your W2 - the IRS knows not to request SE taxes on the 85K. – littleadv Feb 17 '14 at 18:41
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  1. Your decision to treat your llc as a sole proprietor or a c-corp will not affect the Social Security tax you pay in the 85k salary income.

  2. If you treat the llc as a disregarded entity, thus the llc is reported as a sole proprietor (schedule C in your case), you will pay 15.3 in self-employment tax for the 1k and your taxable income will increase by a 1k. This is your best choice based on the small income received by your llc.

  3. If you treat your llc as a C-corp, your personal income tax is not affected, but the tax reporting for a c-corp is a lot more complicated. You may have to report yourself as an employee and file federal and state payroll tax forms, pay corporate tax on income and pay separate fees for completing the corporation taxes. For this choice you should consult a tax accountant.

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