How to Actually Lower LLC Taxes – Don’t Make This Mistake + FAQs

Lana Dolyna, EA, CTC

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LLC owners often feel taxes take a big bite out of their profits.

In fact, some studies estimate over 90% of small businesses overpay on taxes because they miss out on deductions or smart planning.

The good news is that with the right strategies, you can legally reduce your LLC’s tax burden and keep more money in your pocket. This guide will break down expert tax-saving tactics into clear, actionable steps.

How Can I Lower My LLC Taxes? (Quick Answer) 💡

To lower your LLC taxes, use proactive tax planning and take advantage of every available break. Here are the key ways:

Maximize deductions: Write off all legitimate business expenses (equipment, supplies, home office, travel, etc.) to shrink your taxable profit.
Claim tax credits: Use any credits your business qualifies for (e.g. R&D credit, hiring credits) to cut your tax bill dollar-for-dollar.
Take the 20% pass-through deduction: If eligible, use the Qualified Business Income deduction to exclude 20% of your LLC profit from federal tax.
Consider an S-Corp election: If your LLC is profitable, elect S-Corp tax status to reduce self-employment taxes on a portion of your income.
Contribute to tax-advantaged accounts: Use a retirement plan (SEP IRA, Solo 401k) or HSA to deduct contributions and lower taxable income.
Time income and expenses: Shift income or expenses between years (when possible) to keep income in lower tax brackets.
Optimize for your state: Know your state’s LLC taxes or fees and use any state-specific breaks (or choose a business location with lower taxes if feasible).

These strategies, explained in detail below, can significantly reduce your LLC’s tax bill when implemented properly.

Federal Tax Strategies to Slash Your LLC’s Tax Bill 💰

Most tax-saving moves start at the federal level. The IRS doesn’t have a special “LLC tax” – by default, your LLC’s profits pass through to your personal tax return. So lowering LLC taxes means lowering the taxes on your business income. Here are powerful federal strategies:

1. Claim Every Deduction and Credit 📝

Deductions directly reduce your taxable income, so claim all business expenses you’re entitled to. Common write-offs include:

Equipment and supplies: Computers, tools, software, office supplies.
Business travel and vehicle: Mileage, airfare, lodging, 50% of business meals.
Home office: A portion of rent/mortgage and utilities if you have an exclusive work area at home.
Professional services: Fees for accountants, lawyers, consultants, and tax prep.

Keep receipts and documentation for every expense. Every dollar deducted is money not taxed.

Also look for any tax credits available to your LLC. Credits are even better than deductions because they cut your tax bill dollar-for-dollar. For example, if your business does product development, you might qualify for an R&D credit. If you hire from certain target groups, a Work Opportunity Tax Credit could apply. Credits can be niche, but they provide significant savings when available. The bottom line: don’t leave money on the table. Take full advantage of deductions and credits to shrink your taxable income as much as possible.

2. Leverage the 20% Qualified Business Income Deduction 📊

One of the biggest tax breaks for LLC owners is the Qualified Business Income (QBI) deduction (Section 199A). It allows you to deduct 20% of your LLC’s profit from your taxable income. (This pass-through break was created by the Tax Cuts and Jobs Act of 2017.) In essence, if your LLC earned $100,000 in profit, you could potentially get a $20,000 deduction, paying tax on only $80,000. This deduction is available to most LLCs, with a few conditions:

Income thresholds: The full 20% deduction is generally available if your taxable income is under certain limits (around $180k for a married couple or $90k for single filers, in 2025 – these adjust periodically). Above those levels, the deduction can phase out or be limited, especially for certain service businesses.
Type of business: Most businesses qualify, but if you’re in a “specified service” field (like law, accounting, consulting, medicine, etc.) and your personal income is above the threshold, the deduction phases out. Non-service businesses above the threshold have formula limits based on W-2 wages paid and assets, but many small LLCs won’t hit those limits.

Maximizing the QBI deduction is mostly about awareness – you just claim it on your tax return. Ensure your tax software or preparer calculates it. If you’re near the income limit, plan to stay under it (for example, by contributing to retirement accounts or other deductions) to preserve this valuable tax break. The QBI deduction is essentially a 20% tax discount for being a business owner, so make sure you take it if eligible.

3. Elect S-Corporation Status to Reduce Self-Employment Tax ⚖️

By default, all your LLC’s profit is subject to self-employment tax (15.3% for Social Security and Medicare) in addition to income tax. However, if you elect to have your LLC taxed as an S-Corporation, you can save on those self-employment taxes. Here’s how it works:

As an S-Corp, you become an employee-shareholder of your own company. You pay yourself a reasonable salary for the work you do. That salary is subject to payroll taxes (the same 15.3%, split between employer and employee).
Any profit left after paying yourself can be taken as a distribution. Distributions from an S-Corp are not subject to self-employment tax.

By channeling some income as a distribution, you avoid the 15.3% tax on that portion. For example, if your LLC has $100,000 profit and you pay yourself a $60,000 salary, the remaining $40,000 would be a distribution that escapes the 15.3% tax. That saves about $6,120 in taxes right off the bat. (You’d still pay regular income tax on all $100k, just as before.)

Important: The salary you pay yourself must be reasonable for your role and industry. You can’t set it unreasonably low just to maximize untaxed distributions — the IRS watches for that. Also, an S-Corp comes with more paperwork (payroll, an S-Corp tax return). Typically, it’s worth considering this move once your LLC’s annual net profit is around $50,000 or higher. At that point, the tax savings often outweigh the extra costs. An S-Corp election, done right, can save many LLC owners thousands of dollars each year in taxes.

4. Defer Taxes with Retirement Plan Contributions 🏦

As an LLC owner, you can set up retirement plans for yourself that not only build your nest egg but also reduce your current taxes. Contributions to these plans are deductible. Some popular options:

SEP-IRA: Simplified Employee Pension IRA. You can contribute up to 25% of your net self-employment income (with a max around $66,000 in 2023). It’s easy to set up and flexible – you can even contribute after year-end, by the tax filing deadline.
Solo 401(k): If you have no employees (other than possibly your spouse), you can create a 401(k) just for you. You can contribute both as the employee (a salary deferral) and as the employer. The combined limit is high (in the same ~$60k range, depending on your income and age). This plan also allows additional “catch-up” contributions if you’re over 50.
SIMPLE IRA: A bit lower contribution limits (around $15k plus a small employer match), but simpler administration. Good for slightly larger small businesses with a few employees.

For example, if your LLC earned $80,000 and you put $15,000 into a SEP-IRA, you now only pay tax on $65,000. You’ve deferred tax on that $15k (and it grows tax-deferred for retirement). Utilizing a retirement plan is a classic win-win: you save for the future and slash your tax bill today. Even late in the year, you can decide to make a contribution for last year (before you file taxes) to retroactively get the deduction, which gives you flexibility in tax planning.

5. Time Income and Expenses Strategically 📆

Timing is everything – even in taxes. Smart timing of when you incur expenses or receive income can reduce taxes, especially if your income varies year to year:

If you’ve had a strong year and are in a higher tax bracket now than you expect next year, consider accelerating expenses before year-end. Buy needed equipment now, stock up on supplies, or prepay for services (like an annual insurance premium or professional fees) to get the deduction this year. This lowers your current taxable income.
Conversely, defer income. If possible, push some client billing or projects into January so that you receive that income next year when your tax rate might be lower.
If you had a slow year (lower income) and expect next year to be higher, do the opposite: defer expenses (if you can) and accelerate income into this year, to take advantage of your lower bracket.

Example: You plan to buy a new work laptop. If you buy it on December 31, you get the deduction this year; buy it on January 1, you wait a whole year to benefit. By controlling timing, you can smooth out your taxable income across years and avoid spiking into a higher tax bracket. Just ensure any moves make business sense (don’t buy things you don’t need purely for a write-off). But if the timing is flexible, use it to your advantage.

6. Maximize Depreciation Deductions (Section 179 & Bonus) 🚜

When your LLC buys big-ticket assets (machinery, computers, vehicles), take advantage of special depreciation rules to write off those costs faster. Normally, you’d deduct a portion of the cost each year over the asset’s life. But with Section 179 and bonus depreciation, you can often deduct the full cost in the year of purchase:

Section 179: Lets you immediately expense the cost of qualifying business equipment and software (up to a large annual limit, over $1 million). Most common small-business purchases (computers, machinery, furniture, etc.) qualify. If you buy and use it this year, you can write off the entire cost instead of spreading it over years.
Bonus depreciation: A federal incentive currently allowing 100% first-year depreciation on many new (and used) assets. (The 100% rate is scheduled to phase down in coming years.) Bonus depreciation can be taken even if it causes a net loss, and it has no specific dollar cap.

For example, buying a $30,000 work truck could give you a $30,000 deduction this year (instead of maybe $6k per year for five years). That might save you around $6k–$9k in taxes immediately. These accelerated depreciation breaks reward you for investing in your business by front-loading the tax savings. If you need new assets, using Section 179 or bonus depreciation can result in a hefty tax deduction right away.

State-Specific Nuances: Lowering LLC Taxes in Your State 🗺️

After optimizing your federal taxes, consider your state taxes. Each state has its own rules for taxing LLCs (and some charge extra fees). Key points:

State Income Taxes – High vs. None

LLC income flowing to you will usually be subject to state income tax if your state has one:

High-tax states: States like California, New York, New Jersey (among others) have steep personal income tax rates (often 8–13%). If you live or operate in these states, expect to pay a significant state tax on your LLC profits.
No-tax states: A handful of states (Texas, Florida, Washington, Nevada, etc.) have no state income tax on individual income. Operating in these states can save you that layer of tax entirely.

Remember, you owe tax where you earn and reside. Forming your LLC in a tax-free state won’t help if you actually do business in a state that has income tax – that state will still tax your income. (In fact, you’d just end up filing in two states.) So generally, base your business where it truly operates.

Extra LLC Taxes and Fees by State

Many states impose franchise taxes or annual fees on LLCs:

California: $800 annual LLC tax (mandatory, even if zero profit) + an additional fee if your gross revenues exceed $250k (increases with revenue).
Texas: No personal income tax, but a franchise tax (~0.75% of revenue, after certain deductions) applies to LLCs with gross revenue above about $1.2 million. Smaller LLCs under that threshold owe no franchise tax.
New York: No statewide LLC tax, but an annual LLC filing fee (ranging from $25 up to $4,500 based on your LLC’s income in NY).
Other states: Most states charge either a modest annual report fee (for example, $50-$200) or have their own version of a franchise tax. For instance, Tennessee levies an excise tax (~6.5% of earnings) and a minimum franchise tax (starting at $100) on LLCs. Always check your state’s specific rules so you can budget for these.

State Tax Breaks and Workarounds

Look out for any state-specific tax credits or incentive programs that your business can use (like credits for new jobs, investments, or research in the state). Additionally, in response to the federal $10k limit on state tax deductions, some high-tax states introduced a Pass-Through Entity Tax option. This lets the LLC pay state income tax at the entity level, so the business owner gets a full deduction for those state taxes on the federal return (bypassing the SALT cap). If you’re in a state like California, New York, New Jersey, etc., and you pay a lot in state tax, ask your tax advisor about this option – it could reduce your federal tax.

In short, factor in your state’s rules. State taxes and fees can add up, but being aware of them means you can plan accordingly (and take advantage of any local breaks). The best approach is a holistic plan that considers both federal and state taxes for your LLC.

Common Mistakes to Avoid When Lowering LLC Taxes ⚠️

Even smart strategies can backfire if misapplied. Avoid these common tax mistakes LLC owners make:

Mixing personal and business finances: Always separate your business expenses/accounts. If you co-mingle funds, you might lose deductions (and even legal protection). Keep a dedicated business bank account and credit card.
Assuming an LLC automatically cuts taxes: An LLC alone doesn’t create tax savings. It’s the tax elections (like S-Corp) and deductions you use that lower taxes. Don’t expect tax magic just from registering an LLC without further planning.
Forgetting quarterly taxes: If your LLC makes profit, you likely need to pay quarterly estimated taxes to the IRS (and state). Missing these can lead to penalties and interest. Mark your calendar for those four due dates.
Paying yourself wrong in an S-Corp: If you elect S-Corp, don’t set your salary too low (trying to avoid all payroll tax) or too high (defeating the purpose). It must be reasonable. Extreme positions draw IRS scrutiny and penalties.
Overlooking the QBI deduction: Some owners or preparers miss claiming the 20% Qualified Business Income deduction. Double-check that you’re taking this if you’re eligible – it’s a huge benefit you don’t want to skip.
Spending unnecessarily for a “write-off”: Don’t buy stuff you don’t need just to get a tax deduction. Remember, spending $100 might save you $20–$30 in tax, but you’re still out $70–$80 net. Focus on wise expenses that also have tax benefits, not the other way around.
Poor record-keeping: You claim a bunch of deductions, but can you prove them? Not keeping receipts, mileage logs, or invoices can hurt you in an audit. Stay organized so every deduction is backed up.
Ignoring state and local obligations: Don’t forget state or city taxes, business licenses, or fees. Many get a nasty surprise from things like the California LLC $800 fee or a city business tax they didn’t know about. Know all the levels of tax you need to pay.
DIY beyond your comfort: As your tax situation becomes more complex (multiple owners, high income, multi-state, etc.), consider hiring a CPA or tax professional. Mistakes can cost more than professional fees. An expert can ensure you’re taking advantage of all opportunities and staying compliant.

Key Tax Terms Explained 🗝️

Let’s clarify some important tax concepts we’ve mentioned:

Pass-through entity: A business structure (LLC, partnership, S-Corp) where the business itself doesn’t pay income tax. Instead, profits pass through to owners who report the income on their personal tax returns.
Self-employment tax: The 15.3% combined Social Security and Medicare tax that self-employed individuals pay on business income. (When you work for someone else, this is taken out of your paycheck; when you’re your own boss, you pay both the employer and employee portions via this tax.) Strategies like an S-Corp aim to reduce the amount of income subject to this tax.
Deduction: An expense that reduces your taxable income. For instance, a $1,000 business deduction might save you about $200–$300 in taxes, depending on your tax bracket, because it lowers the income that is taxed.
Tax credit: A direct subtraction from your tax bill. A $1,000 credit cuts your tax due by $1,000, regardless of your tax rate. (Credits are less common but very valuable when you can get them.)
Qualified Business Income (QBI): Generally, the net profit from your business that qualifies for the 20% pass-through deduction. Most operating income from an LLC qualifies. High-income owners in certain service industries may face limits, but for many, QBI is just “business profit” eligible for the extra 20% deduction.
S-Corporation (S-Corp): A special tax election an LLC or corporation can make to be treated as a pass-through entity that splits income into salary and distributions. The purpose is to save on self-employment taxes by only levying those taxes on the salary portion. S-Corps require adhering to IRS rules (like reasonable salary and filing an S-Corp tax return).
Depreciation (and Section 179): The method of deducting the cost of a business asset over time. Section 179 (and bonus depreciation) are special provisions that let you speed up depreciation – often allowing a full deduction in the year of purchase. This gives you a tax break upfront for buying things like equipment, instead of spreading the deduction over several years.
Franchise tax: A state-level tax or fee for doing business in that state. It’s usually a flat fee or based on something like revenue or capital, not on profit. (For example, California’s $800 LLC fee or Delaware’s franchise tax on corporations.) It’s an extra cost of operating in certain states, on top of any income tax.

Detailed Real-World Example 📝

Let’s illustrate how these strategies can add up. Consider Jane, who owns an LLC consulting business:

Profile: Jane’s LLC made $120,000 in revenue this year. After her business expenses (software subscriptions, travel, etc.), her net profit is $90,000. She’s the only owner.
Tax moves she makes: During the year, Jane kept good records and used several strategies:
- She bought new equipment (a $3,000 computer and a $1,500 office furniture set) and expensed them fully using Section 179.
- She has a dedicated home office, allowing her to deduct $2,000 in home office expenses.
- She contributed $10,000 to a SEP-IRA for herself, reducing her taxable income.
- Her final business profit after these deductions was around $75,000. She qualifies for the 20% QBI deduction, which knocks another $15,000 off the taxable amount, leaving only $60,000 of her business income taxable federally.
- On that $60,000, she’ll pay her regular income tax rates. She also has to pay self-employment tax on the $75,000 profit (about $11,475).
- If her profit grows in future years, she plans to elect S-Corp status to save on self-employment taxes, but for this year at $75k profit, she stuck with the default LLC taxation.
Outcome: By using deductions and retirement contributions, Jane lowered her taxable business income from $90,000 to $60,000 federally. If she’s in a ~22% federal bracket, that’s roughly $6,600 less in federal income tax than if she hadn’t planned. Plus, she’s built retirement savings. Overall, she saved several thousand dollars in taxes through these moves. This example shows how proactive planning translates into real dollars saved.

Evidence and Analysis: Why These Strategies Work 📈

Why do these tactics actually save money? In short, tax savings come from reducing the amount of income that gets taxed or from using lower tax rates:

When you increase deductions, you lower your taxable income. Less taxable income means less tax, plain and simple. For example, every $1,000 you deduct might save you roughly $200–$300 in tax (depending on your bracket). Over many deductions, that really adds up.
Using an S-Corp shifts some income from being subject to 15.3% self-employment tax to being free of that tax (as a distribution). That’s a direct 15.3% savings on that chunk of income. Over a year, avoiding 15.3% on say $50,000 of distributions saves about $7,650.
The 20% QBI deduction literally lets you cut one-fifth of your business profit out of the taxation equation. That can significantly drop your effective tax rate. If your combined federal/state tax rate is 30%, that 20% deduction on $100k profit (which is $20k off) saves you about $6k in tax.
On the flip side, not planning can cost you. If you don’t track expenses or use these strategies, you’re effectively leaving money on the table for the IRS. A large majority of business owners miss some deductions or pay more than they legally have to.

In our example with Jane, careful planning cut her taxable income by one-third and saved her several thousand dollars in tax. The more income you have, the more these strategies matter. A bit of planning can shave your tax rate down and keep more profit in your hands, fueling your business or personal goals. This is why tax experts emphasize proactive tax planning – it truly impacts your bottom line.

Comparing Tax Strategies for LLCs ⚖️

To solidify our understanding, let’s compare a couple of scenarios and strategies side by side:

S-Corp vs. Standard LLC (Sole Proprietor): Suppose your LLC has $100,000 profit before owner compensation. Here’s a simplified comparison of tax outcomes as a regular LLC versus an S-Corp (assuming a moderate income tax bracket for the owner):

Scenario	LLC (No S-Corp)	LLC as S-Corp
Business profit	$100,000 (all pass-through to owner)	$100,000 (before paying owner)
Owner’s salary	N/A (no salary, just profit)	$60,000 W-2 salary
Remaining profit (distribution)	N/A (all was profit)	$40,000 distribution
Self-employment/Payroll tax	~$15,300 (15.3% on $100k)	~$9,180 (15.3% on $60k salary; none on $40k)
Taxable income (federal)	$100,000 (all business profit)	$100,000 (salary + distribution)
20% QBI deduction	$20,000 (20% of $100k)	$8,000 (20% of $40k, since only the distribution qualifies)
Taxable income after QBI	$80,000	$92,000
Approx. income tax (24% bracket)	$19,200	$22,080
Total tax (SE + income)	$34,500	$31,260
Effective tax rate	~34.5%	~31.3%

In this scenario, the S-Corp strategy saved roughly $3,240 in total tax on $100k of income, mainly by cutting self-employment tax. (The S-Corp did end up with a smaller QBI deduction, but the self-employment tax savings outweighed that.) The higher your profit, the more an S-Corp can potentially save – but remember the need for a reasonable salary and the added compliance costs.

Tax Deduction vs. Tax Credit: It’s worth reiterating the difference: a $1 deduction saves you a percentage of that in tax (based on your tax rate), whereas a $1 tax credit saves you the full $1. So if you’re choosing between a credit and a deduction, the credit is usually more potent. That said, you generally don’t “choose” one over the other – you take all that apply.

Relationships Between Key Tax Entities 🤝

Understanding how different parties connect in the tax system can help you navigate LLC taxes smarter:

LLC and the IRS: By default, the IRS doesn’t treat an LLC as separate from its owner for income taxes. A single-member LLC is “disregarded” (its income goes on the owner’s Form 1040), and a multi-member LLC is treated as a partnership (filing a partnership return, with income passed to owners). Only if you elect corporate taxation (S-Corp or C-Corp) does the IRS view the LLC as a separate taxpayer. In essence, in most cases you and your LLC are one and the same to the IRS when it comes to income taxes.
Federal vs. State: Federal and state taxes are separate. The IRS collects federal tax, and your state’s revenue agency collects state tax. States often use your federal taxable income as a starting point, but they may have different rates and rules. For example, you might get a deduction on your federal return that isn’t allowed on the state return (or vice versa). And as noted, some states impose extra LLC fees or franchise taxes regardless of profit. Always consider both layers: a strategy that saves you federal tax could have a smaller benefit (or even a cost) at the state level.
Owner as Employee (in an S-Corp): In a regular LLC, you are self-employed. If your LLC elects S-Corp status, you become both an owner and an employee of your business. This creates a new relationship – your company must pay you a salary and withhold payroll taxes like any employer would. It adds complexity (you have to run payroll), but as discussed, it can save money by splitting your income into salary and distributions. Just remember that when you wear the “employee” hat, you have to follow the rules any employer/employee would (payroll filings, reasonable compensation, etc.).

In summary, your LLC’s profits flow through various channels – from the business to you, from you to the IRS, and to your state. Knowing how these pieces connect (and who needs what information) will help you stay compliant and optimize your tax strategy without stepping on any toes.

FAQ 🤔

Q: Do people with LLCs pay less taxes automatically?
A: No. Forming an LLC alone doesn’t cut your taxes. You lower taxes by claiming deductions, credits, or electing S-Corp status – not just by having an LLC.

Q: What can I write off as an LLC owner?
A: You can deduct any ordinary and necessary business expense (equipment, supplies, home office, travel, marketing, etc.) as long as it is legitimately for your LLC’s business operations.

Q: Is an S-Corp really that beneficial for a one-person LLC?
A: It can be, especially if your net profit is high enough (often above ~$60K). An S-Corp can save on self-employment tax. But it adds complexity, so for lower incomes the benefits may be minimal.

Q: Which state is best for LLC taxes?
A: Form your LLC in the state where you do business. No-tax states (Texas, Florida, etc.) only help if you live/work there. Otherwise, you still owe taxes where you operate.

Q: Can I avoid the $800 California LLC tax?
A: Not in the long run. California charges $800 yearly for any active LLC, profit or not (barring a first-year exemption for new LLCs). If you operate in CA, you generally must pay this franchise tax.

Q: How should I pay myself from my LLC to minimize taxes?
A: Default single-member LLC: take owner draws (taxed on profit, not draws). S-Corp: pay yourself a reasonable salary (payroll taxes apply) and take remaining profit as distributions (not subject to payroll tax).

Q: Can my LLC pay 0 taxes if I reinvest everything?
A: If you spend all your earnings on business needs, your taxable profit can be zero, so no income tax. But you’ll still owe self-employment tax on any net earnings and any state fees.

Q: I had a loss in my LLC – does that help my taxes?
A: Yes. An LLC loss can offset other income (like wages), lowering your total taxable income. Be mindful of any limits, but generally a business loss can reduce your overall taxes.

Q: Should I hire a CPA for my LLC taxes or can I do them myself?
A: For simple cases, you can DIY with software. But if your taxes are complex (high income, multiple strategies, multi-state, an S-Corp election, etc.), a CPA is worth it to maximize savings and stay compliant.

Q: If I convert my LLC to a corporation, will I save money on taxes?
A: Usually not. A C-Corp pays 21% itself, and then dividends to you are taxed again. Most small businesses pay less tax overall by staying an LLC (pass-through or S-Corp) to avoid double taxation.