Starting A Small Business
🙋♂️ Getting Started – Business Basics
This is a topic I love because it is one where we can provide a lot of value. Every year, I have clients I work with that save over $30,000 in taxes using the strategies below. But there are some things you must understand. You need to crawl before you can walk.
First Things First.
Start off as a Sole Proprietor – This is one person owning and operating a business without a legal entity.
Unless you need legal protection or have a requirement for certain industries, an LLC is not helpful in the beginning.
Open up a separate bank account. Run all income and expenses through it.
Open up 1 credit card if needed. Pay it off monthly.
Name – If you want a name you can file a DBA (Doing Business As) at your local county clerk’s office.
When I started out my first marketing company I was doing business as “Ad Nemesis”, but it all flowed into a separate personal account.
Start a business to…
Make additional money
Change your lifestyle
Follow a passion.
Do not start a business to save on taxes only…
Let’s assume you are in a 24% tax bracket…
You spend a $1,000 on a lawyer to form your LLC.
You saved $240 in taxes, but you are still out $1,000.
You actually lost $760 total, even though you pay less in taxes.
💵 Additional Write Offs.
Once you have started your own business, there are some additional write-offs that are not available to W-2 Workers anymore. The big ones are…
Home Office Expenses
Business related mileage or auto expenses
Meals
Travel
Just remember to be realistic. When you first start a business, you can take a loss for a year, maybe 2. ‘Start Up’ expenses are legit.
After that, the IRS expects to see increasing sales/revenue and smaller losses. Running a business with little or no income and huge losses every year is a common red flag for audits.
👨⚖️ LLC’s & S-Corp’s
The biggest difference between LLC’s and S-Corps is the taxation, discussed more in the next section. What you need to know…
LLC’s
Provides a layer of legal protection as long as the LLC owns the assets.
DOES NOT provide any tax benefits.
A Single Member LLC is known as a ‘Disregarded Entity’ by the IRS. You are taxed the same way as a Sole Prop and a Single Member LLC.
This does change if there are multiple partners in a business.
Side Note: I have seen many property owners file LLC’s for legal protection. However, if the owner is on title and not the LLC, then there is no actual protection. Any lawsuit against a property will be against whoever is on title for the house.
S-Corps
You can elect to have your LLC taxed as an S-Corp using an ‘S Election’.
Change the taxation a bit…
Salaries & Wages are taxed the same.
Profits are not subject to FICA taxes (discussed below).
The savings can be big, but only when you are making enough income. I suggest north of $70,000 after expenses.
LLC’s cost money to file.
S-Corps require an additional tax return.
Many states require additional fees – California is $800 annually
Corps require payroll – Normal minimum monthly charge is $50/month for software.
LLC’s and S-Corps can be beneficial, but it is important to use them properly and when the time is right. Otherwise, you will over complicate things and overspend and there will be no savings available.
📍 Big Tax Savings
To understand how the tax savings work, you need to understand some basics on personal taxes in America.
- Income taxes – These are taxes paid on earned income throughout the year.
- FICA Taxes – Social Security and Medicare taxes. 7.65% paid by the employer and 7.65% paid by the employee. You will see these on your W-2. Taxpayers in the US are capped at $184,500 for 2026. You do not pay FICA on income over that amount.
Sole Proprietor – all of your earnings (up to $184,500) are subject to FICA taxes of 15.3%. You are your own boss. So you pay both. So if you made $100,000, you would pay $15,300 in FICA in addition to income tax.
S-Corp – If you make $100,000 as above, it is taxed differently.
- You pay yourself a salary of $50,000.
- This is subject to the same FICA taxes – $7,650
- The remaining $50,000 is business profit.
- This is NOT subject to FICA. Tax savings = $7,650
It may seem silly to do all this work. And I agree. But I don’t make the rules. I only know that Jeff Bezos’s salary is $81,840. The strategy works.
One important rule – the IRS requires your S-Corp salary to be “reasonable” for the work you actually do. Pay yourself too little just to dodge FICA and you can get penalized, so this needs to be set thoughtfully.
Don’t forget the QBI deduction – on top of the FICA savings, business owners may also qualify for the Qualified Business Income (QBI) deduction – up to 20% of your business profit. The 2025 tax law made it permanent, and it applies to sole proprietors, LLCs, and S-Corps that qualify.
🏖️ Retirement Accounts
I have written a separate article on this, but retirement accounts for businesses are a big way to save…
- They reduce taxes in the highest tier of your income, which makes a big impact. If you need a refresher on tax tiers, read here.
- There are 3 common ones…
- 401K – Allows you to contribute up to $24,500 as an employee.
- SEP – Allows you to contribute up to 25% of salary compensation.
- Solo 401(K) – Allows you to do both of the above. This is what I use.
Retirement accounts should only come after you have taken the above steps and have a decent savings net. For the first several years in business, I only contributed to a personal ROTH. Then I moved to a SEP for about 7 years before finally getting to the point of using a Solo 401(K).
🤔 Parting Thoughts
As always, thanks so much for reading! If you enjoy reading, please share these articles with anyone (subscribe here) that you feel might benefit.
If you have any additional questions, please reach out. We help individuals and businesses year-round with personal and business tax services.
Thanks,
– Taxman