There’s who you think you are and who you really are. We all question who we are at some point during our lives, but did you know it’s an important tax topic too? Taxes differ depending on who you are, so it’s crucial you know who you (and your business) are.
A real estate agent formed an LLC and thought they were good with their taxes until their CPA gave them some bad news, leaving the agent saying, “I was not who I thought I was, and it cost me $20,000.”
When you register an entity with a state, it becomes its own entity, according to the state, but as some of you might know, the IRS marches to their own beat. “But ‘they’ told me I was okay,” you say. “They’ are your friends or other well-intentioned individuals, but are “they” tax professionals with twenty years of experience that can provide you with the insight a CPA can?
The reality is that, with the state, you are organized and classified as an LLC, but the IRS doesn’t classify you the same way.
- If there are two or more owners of an LLC, they consider you a partnership
- If you are a single- member LLC, they consider you a sole proprietorship
The major difference between a single member LLC and a sole proprietorship is a legal question for which you should seek advice from a licensed legal professional. For tax purposes, however, there is no difference between the two. A single member LLC and a sole proprietorship both file a schedule C on their personal tax return. All the profit of a schedule C is subject to self-employment tax, so if you don’t want to pay self-employment tax on your entire profit, you might want to consider asking us to help you form an S-corporation.
Do you know who you are or what you should be? Are you unsure? Come in or call to talk to us soon, because being someone other than who you think you are can be extraordinarily expensive.