The Tax Cuts and Jobs Act was signed into law on Dec. 22, 2017, under former President Trump. The plan brought significant changes to the U.S. tax system, reducing the corporate tax rate and simplifying individual income taxes.

The legislation set a flat corporate tax rate of 21% for a C corporation (or C-Corp), down from the original 35%, while allowing business income for 澳洲幸运5官方开奖结果体彩网:limited liability companies (LLCs) and S Corporations (S-Corps) to be taxed at individual rates (10% to 37%).

A commonly voiced concern with the new tax system was that it potentially created a tax loophoꦆle that encourages individuals to establish pass-through entities like LLCs and S Corporations. By doing so, the🥂ir business income would be taxed at their personal tax rate, leading to variable tax rates for LLCs.

However, key provisions of the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act are set to expire at the end of 2025, which could lead to increased corporate tax rates for LLCs and changes in capital gains taxes. Republicans in Congress have introduced legislation to make the tax cuts for individuals and small businesses permanent.

What Is a Pass-Through Entity?

An LLC is classified as a pass-through or 澳洲幸运5官方开奖结果体彩网:flow-through entity, meaning its taxes are paid through the individual income tax code rather than through a corporate tax code. This approach allows entrepreneurs to avoid double taxation on both their personal and business tax returns.

Similar to LLCs, other business structures like sole proprietorships, S Corporations, and partnerships also function as pass-through entities, benefiting from this tax structure. C Corporations do not fall under this category and are taxed separately under the corporate t💖ax co🦹de.

How the LLC Tax Rate Is Calculated

C-Corps face double taxation: first at the corporate level and then at the personal level for owners. Not surprisingly, smaller companies that don't need a C-Corp's unique structure or the ability to publicly trade shares often choose to be LLCs or 澳洲幸运5官方开奖结果体彩网:S Corporations instead.

Meanwhile, LLC owners benefit from being able to deduct up to 20% of their business income before taxes are calculated, making it advantageous to file as an LLC. The effective tax rate can vary from 10% to 37%, depending on the individual's filing status and income level.

Small businesses that are not seeking to raise capital from public 澳洲幸运5官方开奖结果体彩网:shareholders but desire greater legal🎃 and financial protection for personal assets often form LLCs. All 50 states allow LLCs to consist of just o🦩ne person.

How to File As an LLC

Forming an LLC is relatively simple. While it varies by state, the process typically entails filing articles of organization with the state, completing a fill-in-the-blank form, and paying a filing fee. For better financial and legal protection, owners should create an LLC operating agreement even in states that don’t require one. Owners might want to 澳洲幸运5官方开奖结果体彩网:use an LLC filing service to help them meet their 🔥annual business filing reꩲquirements.

Anyone can form an LLC, but that doesn’t mean anyone can generate income as an LLC. According to CPA Aaron Lesher of , a small bu🔯siness finance app, “a regular salaried employee could theoretically quit their job, create an LLC, and sell their freelance services back to their company to avoid paying a higher income tax rate." However, Lesher notes, “The employee-as-an-LLC idea is a massive audit red flag.”

It isn’t simply up to employers or empﷺloyees to decide how workers are classified. Their classification depends on how they measure up to various guidelines in the🐎 tax code.

“The IRS is very clear on the differen🌟ce between a contractor and an employee,” says Josh Zimmelman, president of , a New York City-based accounting firm. “Tꦍhere are three main factors they look at: financial control, behavioral control, and relationship type.”

• Financial control: The IRS looks at whether the worker is paid a regular wage, an hourly rate, or a flat fee per project. “An employee is generally guaranteed a regular wage amount for an hourly, weekly, or another period,” the IRS states on its website. “This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An 澳洲幸运5官方开奖结果体彩网:independent contractor is generally paid a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.”
• Behavioral control: The IRS looks at whether a worker has control over when, where, and how they perform the work. “For example, an employee has regular hours and is told where to work; a contractor is offered more freedom as long as the work gets done,” Zimmelman says.
• Relationship type: The IRS reviews any written agreements between worker and employer, including the permanency of the relationship. “For example, if a worker receives benefits [such as] 澳洲幸运5官方开奖结果体彩网:health insurance, sick pay, vacation pay, etc., then they are likely an employee,” Zimmelman says. “Misclassifying an employee as a contractor may result in penalties, especially if that worker is paid in the same manner as regular employees.”

The first step in any plan to turn salaried personal income into LLC income is that the employer must agree to pay the employee as an independent contractor. Certain employers may be game as such an agreement would no longer obligate them to provide health benefits to that worker. However, it's unlikely that most employers would participate in such a plan.

“Most employers know that hiring a self-employed person who is consideredꦍ a disregarded entity—in this case, the LLC—will cause huge problems with the State Department of Labor🌳, and no one wants that,” says , author of "101 Ways to Stay Off the IRS Radar" and CEO of Choice Tax Solutions Inc. in New York City. 

"If a company tries to represent that a person whose work hours they are controlling—and whose desk space and equipment they are providing—is a contractor, they are inviting the IRS, the state, and the Department of Labor (DOL) to audit them. And they won’t win," she concludes.

Assuming the worker and employer could work out a true independent contractor relationship that would survive an audit, the worker must weigh whether their new pay rate as a contractor combined with the loss of benefits—which might include health, dental, life, and 澳洲幸运5官方开奖结果体彩网:disability insurance, 401(k) contributions, and paid time off—⛄would be worth the tax savings.

How LLCs Save Under the LLC Tax Reform Plan

Unlike C corporations, LLCs are not considered separate entities so they do not pay taxes themselves. By default, single-owner LLCs are taxed as sole proprietorships, but LLCs can choose to be taxed as S-Corps or C-Corps, which may benefit some businesses by reducing their employment taxes, namely Medicare and 澳洲幸运5官方开奖结果体彩网:Social Security taxes. 

Let’s assume that an LLC wants to be taxed as an S-Corp to save money on p𝄹ayroll taxes while avoiding the double taxation of a C-Corp. Under Trump’s plan, the change in business tax rates and the large discrepancy between 𝔍the flat business tax rate of 21% and the income tax rates of 10% to 37% might appear to offer tax relief. Tax experts, however, say it’s not that simple.

Independent contractors running small corporations cannot easily abuse the system because the terms of the 2017 tax law require that they be employees of their own corporations and pay taxes via payroll. Eisenkraft explains, “In this case, the sole officer will receive a W-2 and will b🅺e paying taxes at their ordinary tax rate ✱based on wages and other income items on the tax return."

“The flow-through portion may be taxed at a reduced rate, but the IRS will not allow that employee to take less t🐎han a reasonable salary,” Eisenkraft says. “There are many court cases out there where an officer making hundreds of thousands of dollars tries to take a $25,000 salary, and they lose in tax court.”

Taxation♚ of Owner’s Salary vs. Pass-Through Profits

The tax rate an independent contractor pays o𓃲n their income is the same under the Trump tax plan as it was under previous tax law, says financial advisor Bradford Daniel🌼 Creger, founder of in Glendale, Calif.

“An individual must pay income taxes on income received from their own efforts—that is, their own earnings—as ordinary income," he says, "Merely forming an entity doesn’t change this. It only complicates the returns, but the income tax outcome is the same.”

There is one sense in which the Trump tax plan is exploitable, Creger says, "The S corporation."

The simplest and most prevalent example of a pass-through business, the S-Corporation currently allows owners to take both salaryꦓ income and additional income representing the business’s profits as an S-Corp distribution.

The difference between these two types of income is that the salary is subject to 澳洲幸运5官方开奖结果体彩网:payroll taxes and the S-Corp distribution is not, Creger explains. By separating salary from business profits, the owner saves a💙 slight amount in taxes by avoiding payroll taxes on the amount received as an S-Cor🎃p distribution.

In addition, under the TCJA, the S-Corp distribution is taxed at 15% instead of at the individual’s ordinary rate. Thus, the more owners are able to receive as a distribution of profits from their businesses, the more they are likely to save.

The Bottom Line

The Tax Cuts and Jobs Act heavily favors entrepreneurs compared to salaried workers with equivalent incomes. Owners of LLCs might find opportunities in these rate changes, but it's advisable to consult with a tax advisor and possibly a lawyer to navigate these changes legally and profitably.

It's also crucial to remember that the tax reductions from the Act are set to end in 2025, so there may be significant changes in tax rules for businesses in the near future.