As we head into the holidays, there is still time to convert your small business into an S Corporation which save you thousands of dollars in self-employment taxes.
Who is a good candidate for this tax planning move?
A business owner with over $30,000 in net income who is not already an S Corp.
How does an S Corporation save you money? Let us find out.
If you own a business as a garden variety single-member LLC (one owner or shareholder), your business income will be reported on your personal tax return under Schedule C and is subject to self-employment tax (currently 15.3%) and ordinary income tax.
The same is true for a business that has not formed a corporation such as a sole proprietor and partnerships.
So, you could easily pay an average of 30% (15.3% in SE taxes + 15% in income taxes) on all your net business income in Federal taxes. Wow!
Quick Analysis of Self Employment Taxes
If you own an LLC and have elected to be treated as an S-Corp (Subchapter S) for taxation, the business now files a corporate tax return on Form 1120S.
What’s the big deal? Before we get into that, let’s look at some quick numbers. These are based on using a salary of 50% of net income.
Income |
LLC SE Tax |
S Corp
|
Savings |
Savings% |
30,000 |
4,239 |
2,295 |
1,944 |
6.5% |
50,000 |
7,065 |
3,825 |
3,240 |
6.5% |
75,000 |
10,597 |
5,738 |
4,860 |
6.5% |
100,000 |
14,130 |
7,650 |
6,480 |
6.5% |
150,000 |
18,116 |
11,475 |
6,641 |
4.4% |
200,000 |
19,455 |
15,300 |
4,155 |
2.1% |
These savings could increase to 8% or even 9% by having the company pay for your health insurance and make HSA contributions on your behalf.
But time is running out to put this in motion. Give us a call today!
In the meantime, check out our Taxpayer’s Comprehensive Guide to LLCs and S Corps.
