Filing your tax return as an S corporation can help you reduce self-employment taxes
When you file your LLC as an S corporation, you get the advantages of an LLC, but you get another flexible tax treatment of your income. With an S Corp designation, you can treat a portion of your LLC income as wages you pay yourself from the business, and the remaining net business income is called a “distribution” or dividend. Business owners still owe FICA tax on wages, but do not pay tax on “distributed” income. This special tax treatment for LLCs filing as S Corps can help you lower your self-employment taxes.
For example, if you have $50,000 in business income and pay yourself $25,000 in salary and $25,000 in distributions (dividends), your total tax savings is $3,825. As income increases, so do tax benefits. For example, if you report $75,000 in income as an S corporation LLC and you pay $30,000 in salary (receiving the remaining $45,000 as dividends/dividends), you can save $6,885 in taxes. It is paid as a sole proprietor with the same income. Finally, if your business has a net income of $100,000 per year and you pay $40,000 yourself, you can save about $8,461 in self-employment taxes.
How LLC Owners Set Salary
Setting up an LLC to apply as a Reasonable Salary for S Corp Owners involves some complications. For example, you need to decide how much salary you will pay as a business owner, and how much business income you can designate as a “distribution.” for tax purposes.
In the case of an S-Corp, the owners (called shareholders) are also taxed for the benefit of the individual, but are considered employees of the company and are not taxed for the self-employed. Shareholders of the S-Corp received a reasonable salary and were required to pay taxes on that salary. Fully understand the tax implications of converting an LLC to an S-Corp. You should consult a Florida business attorney before making a conversion.
Switch from LLC to S-Corp
Not all LLCs can be converted to S-Corps. To qualify, an LLC must:
- As a home business
- Less than 100 shareholders
- No shareholder is a non-resident alien or part of a partnership or corporation
- Only one class of shares will be issued this time
- Florida has a fairly simplified process for making this change, called a “statutory conversion”; you just have to file a few documents with the Florida Secretary of State after you have prepared a conversion plan that includes the new articles of incorporation and the LLC members have signed off on the conversion. Once you convert your LLC to an S-Corp. Next, you must file Form 2553, Election for Small Business Corporations, with the IRS to select S-Corporation for tax status.
In general, your S Corp Reasonable Salary should be set at a level that competes with reasonable market rates to cover the cost of hiring a full-time employee in a given field. If you’re trying to evade self-employment taxes by paying a very low salary, this could be subject to scrutiny by the IRS. Talk to a tax professional for advice on optimizing your business for tax purposes.
Another consideration for reducing self-employment taxes is that you may also (indirectly) minimize your contributions to your own future Social Security benefits in retirement compared to your contributions when you were an employee. As part of your overall financial plan, be sure to save extra money for retirement.
Should I change my LLC to S Corporation?
As a small business owner, you may be interested in changing an LLC if you choose a limited liability company (LLC) structure for your business and have experienced significant growth since then or want to save on self-employment taxes. to S Corporation.
Difference Between LLC and S-Corp Tax
There are many differences between LLCs and S companies, one of the most important being how they are taxed. From the perspective of the IRS, LLCs are considered “non-profit organizations”. This means that a one-member LLC is taxed in the same way as a sole proprietor. Owner LLC. Personal income tax is paid on profits, and LLC owners must also pay self-employment tax. A multi-member LLC is taxed as a partner. LLC also has the option to be distributed as a partnership and to be taxed as a corporation.