Personal Finance

Should you form an LLC if your income comes from multiple W-2 jobs?

Marc Guberti

Published: February 10, 2025 1:25 pm

A Redditor recently posted in the FIRE Reddit group looking for advice about starting an LLC. The Redditor doubts that there are any tax benefits with starting an LLC over collecting W2 income increase.

Redditors responded to the comments, sharing their thoughts. I’ll share mine as well, but it is always good to speak with a financial advisor if you can.

LLCs Shield You From Liability

Although LLCs do not offer tax benefits on their own, they shield you from liability. This is an important advantage since the Redditor has real estate properties. 

Let’s assume that a tenant falls down the stairs, gets sick, or has another negative scenario because of negligence. That tenant can sue you and potentially get some of your assets. With an LLC, your personal assets are no longer at risk if a tenant sues you. Instead of suing you, they sue your LLC. Some real estate investors create an LLC for each property to enable further protection.

LLCs Can Get Taxed As S Corporations

There actually is a tax benefit to LLCs, depending on how you view it. You can maintain an LLC’s legal structure while opting to have it taxed like an S Corp. These legal entities have pass-through taxes, which means you pay regular income taxes instead of corporate taxes on any profits.

However, the big difference with S Corporations is that you can avoid self-employment taxes on distributions, but you must pay yourself a reasonable salary, which is subject to payroll taxes, including Medicare and Social Security.. Self-employment taxes have a 15.3% rate, and you won’t have to pay it under an S Corp. You can give yourself cash distributions from S Corps, which are not subject to those taxes.

The only downside with this strategy is that by avoiding these taxes, you will end up with lower Social Security benefits and fewer work credits for Medicare.

Why You Shouldn’t Pay Social Security Taxes If You Can Avoid Them Legally

An S Corp allows you to avoid self-employment taxes, but some people may be concerned about having lower Social Security payouts when they get older. While this fear may seem legitimate at first glance, Social Security is a giant dud for taxpayers.

First, you have to wait until you are 62 to take out Social Security. Not everyone who pays into the system makes it to 62. However, if you want the highest Social Security benefits, you have to wait until 70. Again, not everyone makes it to 70.

Then, it’s good to consider how much you put into Social Security over your lifetime versus how much you get out of it. Not everyone can justify it, but some might. Furthermore, you may have already contributed enough to Social Security to ensure that you receive the maximum benefit.

Finally, investors should consider how much they could have gotten in the stock market. If you save $10,000 in Social Security taxes in a single year, you are saving much more than $10,000. An annualized 8% return over the next 40 years would have turned that $10,000 into $217,245.21. If you save $10k per year in Social Security taxes and invest it with an annualized 8% return over 40 years, it could grow to $217,245.21.. That’s assuming you have 40 years for it to compound.

For most people, getting out of self-employment taxes will save a lot of money. LLCs do not allow that on their own. However, if you opt to tax your LLC like an S Corp, you can save a lot of money. It’s good to speak with a professional accountant to get this set up.