If you’ve run your business as an LLC, you know that it is usually taxed as a sole proprietorship. You can, however, have it change to an S-Corp for better tax treatment. But should you? At what point does S-Corp status benefit your business?
How to File for S-Corp Status
Within the first two months and 15 days of the current tax year, filing form 8832 Entity Classification Election, then Form 2553 to choose S Corporation status. Then hold an election for your S-Corp within 75 days (fairly easy if you’re a single member LLC, since you hold all the shares).
Self-Employment taxes, which are paid through LLC/Sole Proprietor status, are 15.3% as of this writing. That is 12.4% Social Security and 2.9% Medicare.
Meanwhile, as an S-Corp, income can be divided into a salary and dividends. For most businesses, this starts to make sense around 40,000$ a year in income. Let’s see why.
As a sole prop / single member LLC, 15.3% of 40,000 comes out to $6,120
Let’s say as an S-Corp you pay half of the 40,000 to yourself as a salary. That is taxed at 6.2% Social Security (the employee half) and 1.45% Medicare. That’s $3,060.
The remaining part would be treated like a distribution, which is not subject to self employment taxation.
Now What do I do?
On the surface, it looks like you’ve saved $3,060, but remember you are now responsible to do these things:
- Payroll setup for your employees, including withholding and remitting employment taxes (and you’re an employee)
- Quarterly estimated taxes: including federal and possibly state depending on where you do business.
- Filing form 1120S annually and issuing a schedule K-1 to all shareholders (if you’re the only shareholder this is easy, but you still need to prepare it)
- You still need to record shareholder meetings and document major decisions.
This is why if you earn less than $40,000 a year in your business, the additional responsibilities can eat away what you’ve saved in taxes. On the other hand, the more you make above $40,000/yr, the more likely you are to save money with this decision, even when outsourcing tax work to CPAs.
Since I’m a bookkeeper and not a CPA, I recommend you seek a CPA for further advice on making this decision if your LLC passes the $40,000 a year income threshold.
To have me be your bookkeeper, and help you track as you approach and pass this mark, schedule a bookkeeping strategy call with me. It will save you 80+ hours a year or more compared to doing all your bookkeeping yourself. That’s two weeks worth of productive hours every year.