How Franchise Owners Can Legally Stop Overpaying the IRS

Sophia Yu
1 day ago
3 min read

I can’t tell you how many franchise owners I’ve worked with who were blindly following their franchisor’s setup—only to find out later they had overpaid the IRS by thousands of dollars.

If you’re a franchisee and feel like you’re working nonstop but not keeping enough of what you earn, this may be why.

Because here’s the truth:

Franchisors teach you how to run the operations.

They don’t teach you how to structure the money.

And structure is where the real savings live.

The Most Common (and Costly) Mistake

Most franchisees are told to “keep it simple” and just operate under one LLC.

Simple? Yes.

Efficient? Not always.

An LLC gives you liability protection. That’s important. But it does not automatically give you tax efficiency.

Without the right tax election and planning, you may be:

Overpaying self-employment tax
Missing out on deductions
Structuring income inefficiently
Losing eligibility for key tax benefits

And the IRS will gladly accept the extra payment.

When Profit Hits $40K+, Your Strategy Should Shift

If your franchise is netting $40,000 or more annually, continuing to operate as a default LLC could mean you’re paying unnecessary self-employment tax.

By electing S-Corporation status under Internal Revenue Code Section 1362, you may be able to:

Pay yourself a reasonable salary (subject to payroll tax)
Take remaining profits as distributions (not subject to self-employment tax)

For many franchise owners, this alone can mean $5,000–$20,000+ in annual savings.

Important clarification:

You don’t choose between an LLC or an S-Corp.

You can have an LLC taxed as an S-Corp — keeping liability protection while optimizing taxes.

Don’t Leave the 20% QBI Deduction on the Table

Under the Tax Cuts and Jobs Act, many franchise owners qualify for the Qualified Business Income deduction under Internal Revenue Code Section 199A.

That’s up to 20% of your business profit deducted before tax is calculated.

Example:

$200,000 in profit
Potential $40,000 deduction

But income thresholds, wage limits, and entity structure matter.

Poor setup can reduce or eliminate this benefit entirely.

The Two-Entity Strategy (For Growing Franchisees)

If you own real estate or large equipment—or plan to—there’s an advanced strategy many franchisees overlook.

Instead of one entity:

Entity #1 – Operating Company (often S-Corp)

Handles day-to-day income and expenses.

Entity #2 – Passive Entity (separate LLC)

Owns the building or major assets and leases them to the operating company.

Why this can be powerful:

Shifts certain income into a different tax category
Creates liability separation
Unlocks depreciation opportunities
May preserve QBI eligibility when structured correctly

This must be done properly—with legitimate leases and documentation. But when implemented correctly, it significantly improves tax efficiency and asset protection.

Accelerated Depreciation = Immediate Cash Flow Impact

Franchise owners often invest heavily in:

Build-outs
Kitchen or service equipment
Fixtures
Furniture

Strategic use of Section 179 and Bonus Depreciation can create large first-year deductions.

That means more cash flow early—when you need it most.

And Then There’s the Legacy Piece

Many franchise owners build impressive businesses but overlook estate and succession planning.

LLCs and S-Corps must coordinate properly with trusts. Without that planning, your family could face probate delays, operational disruptions, and unnecessary tax complications.

You didn’t build this just for today. You built it for long-term security.

The Bottom Line

Franchise ownership isn’t just about following the playbook. It’s about owning a business within a business.

If your structure isn’t optimized, you’re likely overpaying—quietly, consistently, and unnecessarily.

The difference between struggling franchisees and thriving ones is often not effort.

It’s strategy.

If you’re not sure whether your current setup is costing you more than it should, let’s talk. Book a free 15-minute discovery call with our team and we’ll review: