We recently received this question from a USTaxAid Community Member asking how to handle a tax return with a part-time business. They had an LLC, but that wasn’t enough to give them a good direction. In this blog, we’re going to get into one of the most misunderstood part of LLCs.
Here’s the question:
“I own a business registered as an LLC which at the moment i work part time on but i work full time as an employee how is the best way to manage my situation when it comes to tax season?”
And, here’s the answer:
You will have to file a tax return based on the type of business structure you have. An LLC is a tax chameleon. It elects how it wants to be taxed. If you have a single member LLC (only one owner) and don’t elect how you want to be taxed, you’ll be taxed as a Sole Proprietorship. If you have a multi-member LLC and don’t elect how you want to be taxes, you’ll be taxed as a Partnership.
In most cases, the best tax structure for part-time or start-up businesses is the S Corporation. The downside is that you do need to keep a real set of books, you’ll need to pay yourself a salary and you will have to prepare an S Corporation tax return. On the benefit side, you’ll be able to take any losses against other income, you’ll avoid the 15.3% self-employment tax and you’ll have a much lower chance of audit than a Sole Proprietorship (Schedule C). The Sole Prop has a 1 in 3 chance of audit. A small S Corp will have a 1 in 100 chance of audit.