When starting a business, there are two ways you can become official. You can incorporate as a corporation or you can form an LLC. Many people usually go with the LLC . Sometimes because they haven’t mapped out their business goals, sometimes because LLC is easier to maintain, they just want to get started and be official or someone simply told them to get an LLC.
There are different entity structures you can pick based off the way you choose to run your business. However, an LLC is the most common business structure. What many have found is, once they start making a nice profit in their business, the taxes owed become rather much. There’s this thing called self employment tax which is simply social security and medicare paid to government for your retirement. It is a 15.3% tax on the profit you make in your business ( Side Note: you do get almost 50% self employment tax deduction that will help you out during tax season) .
Many people rather keep more of their profit up front then benefit from a tax deduction at the beginning of the year, this way they can invest their earnings back into their business real time and make more money.
So in order to do that many people opt to be taxed as an S corp. You are still consider a single member LLC or a Multi member LLC. You are just asking the IRS to tax you as an S Corporation. An S Corporation is not taxed on it profits. Either the owner keep all the profits in the business or the owner pays himself via payroll and the social security and medicare is withheld from the paycheck is sufficient enough. As long as you are paying yourself a reasonable salary. You can’t do things like profit almost $100,000 and pay yourself $10,000 to save on taxes. That’s not reasonable and can be a red flag to the IRS. A good tip is to pay yourself at minimum 30% of what you make.
For example as an LLC you profit $100,000 you will pay $15,300 in taxes.
As an S Corp you profit $100,000 but pay yourself $30,000 you will pay $4,590 in taxes. This is a big savings of $10,710. This is why you should switch to an S corp. If you think this is something that will be good for your business consult with a professional to see if it will be the best move for you and your business goals.
To discuss how to switch your business to an S corporation schedule a 15 minute free consult with me today. Deadline is coming soon.