LLC S Corp Election Guide for SMB Owners
Aren’t you tired of seeing your business profits go into Uncle Sam’s pocket? Taxes suck, and I’m here to make it suck slightly less. Introducing the S Corp election! I’m AJ, and I’ve owned and automated several businesses (all of them LLCs with S Corp status). I recently created SBB to help small business owners do the same! Let’s nerd out and dive in!
Key Takeaways
LLCs are taxed as pass through entities
By electing to tax your LLC as an S Corp, you'll save on self employment taxes
With S Corp status, you can take part of your wages as salary, and part of your wages as dividends
How is an LLC Taxed?
First, you need to understand how your LLC is taxed. By default, an LLC is considered a “pass-through” entity for tax purposes. This means that the profits and losses of the business pass directly to the owners, who report them on their individual income tax returns. There’s no separate federal income tax for the business itself, which helps you avoid the double taxation issue that’s common with traditional corporations. However, it’s essential to note that while the LLC itself doesn’t pay income taxes, you, as an owner, will be on the hook for self-employment taxes. These taxes are calculated based on the LLC’s total net earnings rather than your actual distribution from the profits. This can sometimes lead to a hefty tax bill, especially for profitable LLCs. But don’t worry, that’s where the S Corp election comes into play. But more on that later! Stay with me; we’re just getting to the good stuff!
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Pro Tip #1: Don't underestimate the power of saving 10% on taxes. It adds up BIG over the lifetime of a business.
- AJ Silber
What is the S-Corp Election?
You might be wondering, “What on earth is an S-Corp election?” Let’s break it down. Essentially, an S-Corp election is a tax designation that you can choose for your LLC. So, why would you want to make an S-Corp Election for your LLC? The main reason is to stop Uncle Sam’s hands from reaching further into your pockets. When your LLC makes an S-Corp election, it can split your income into two parts: salary and business profits. You only pay self-employment taxes on your salary, not the business profits, which can lead to significant tax savings. The only catch is that you have to pay yourself a “reasonable” salary for your position. E.G., you can’t make $1,000,000 a year and take a $10,000 salary and the rest in profit share. But regardless of how much you take in salary, you’ll save a ton on taxes.
LLC S Corp Election Example
Consider a scenario where you are the only member of an LLC, yielding a net income of $100,000. This entire amount will be subjected to self-employment income. In addition to the income tax, you’ll be obligated to pay a self-employment tax of $15,300, representing 15.3% of the income. If you decided to be taxed as an S corporation, you could divide this income into two parts: $50,000 as earnings and $50,000 as dividends (business profits). As a result, your self-employment tax would be reduced to $7,650 , leading to a tax saving of the same amount.
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Pro Tip #2: The S Corp election only takes a few minutes to execute on. In terms of return on time, there's no better investment out there.
- AJ Silber
How to Execute S Corp Election Status
If you prefer to be taxed as a corporation, file Form 8832 (Entity Classification Election). You can then opt to be taxed by an S corporation by filing Election by a Small Business Corporation, Form 2553 .
LLC S Corp Election Final Thoughts
An S Corp Election can offer significant tax benefits for LLCs, particularly those with high profitability. By enabling the division of income into salary and business profits, it reduces the self-employment tax burden. I hope this helps!
The post LLC S Corp Election Guide for SMB Owners appeared first on Small Business Bonfire .
