We can all agree that business owners owe it to themselves to minimize the taxes that they legally have to pay. Am I right
Well, if you own an LLC and have never chosen how you want the IRS to tax your business, then you might be missing out on one of the biggest tax savers out there! This is especially true if your business is starting to earn you some above-average income.
Here’s how it works.
If you haven’t selected how you want your LLC to be taxed, then the default tax scheme for your business is either a “disregarded entity” (if you’re a sole owner or husband-wife business) or partnership taxation (if you have partners). While this might be the easiest way to track things, especially at the beginning, it is definitely not the best way to minimize your taxes when you start earning some serious money with your business.
This is because when your LLC or a disregarded entity or taxed as a partnership, 100% of your profit is passed through and must be claimed by the owners as ordinary employment income. This income is then subject to self-employment taxes.
S-corp taxation is different.
If your LLC is taxed as an S-corp, you still enjoy the benefits of pass-through taxation (meaning it doesn’t get double taxed, like a c-corp) but you can split profits between salary and dividends. The portion you take out as salary is subject to self-employment tax, but the dividends aren’t.
Depending on how much profit your business is making, this benefit offered by S-corp taxation could save you tens of thousands of dollars or more!
S-corp taxation status isn’t simple though.
Not only is it not always the right choice for every business, but S-corp taxation status always gets a bit more scrutiny by the IRS.
Don’t let this worry you though. If you set things up right, and take the right steps moving forward, your S-corp taxation conversion should go totally smoothly.
I can help you:
- Decide if S-corp taxation is right for your business
- Do all the paperwork necessary for a smooth and legal transition (including changes to your LLC Operating Agreement, required business records, and IRS filings)
- Help you put together a business operation plan moving forward to keep your S-corp taxation status totally legal and less likely to cause any red flags
Ready to save taxes with S-corp taxation?