Tax season might’ve passed for this year, but it’s never too late to think about how you can save money on next year's taxes! One key way small business owners can do this is by forming an S Corporation from their existing LLC or C Corporation.
How You Save With an S Corporation Election
As a small business owner, you’re responsible for footing both the employer and the employee’s share of Medicare and Social Security taxes, so you pay twice as much in self-employment taxes as those who are traditionally employed. For the 2017 tax year, the Social Security tax rate for self-employed folks is 12.4 percent, while the Medicare tax rate is 2.9 percent. This means you’ll be paying a total of 15.3 percent of your earnings!
Forming an S Corp can help you save on self-employment taxes. According to Intuit, by organizing your business as an S Corporation election, you can classify some of your income as salary and some of it as a distribution. While you’ll still need to pay self-employment tax on your income portion, you’ll only need to pay ordinary income tax on the distribution portion.
That's because the amount of your income that is designated as salary will be lower, meaning that in turn you'll pay less in self-employment taxes. This could save you up to 7 percent while offering you the same liability protection that an LLC provides.
Say you plan to earn about $60,000 in estimated yearly net income for your small business. If you form an S Corp and pay yourself a salary of $15,000, you’ll be saving a total of $6,885.
If you estimate earning about $90,000 this year and paying yourself a salary of $30,000, you would save yourself a whopping $9,180 in taxes!
And what if you plan on earning a little less? If you are on track to earn $40,000 from your small business and pay yourself $10,000, you would still net a savings of $4,590 a year.
What Can You Do With Your Business Tax Savings?
As you can see, the amount you can save with an S Corp election is not insignificant! This tax savings could be put toward the myriad costs involved in running your small business. If you’re in the process of getting your business off the ground, your startup costs can include large one-time expenditures, equipment, marketing and advertising, legal fees and so on.
Once you get your business up and running, you’ll need to pay recurring expenses such as rent, utilities, and payroll. With some changes anticipated in U.S. health care policy and a potential spike in healthcare costs, saving money when and where you can will definitely help your small business succeed financially.
If you need more resources on tax information, head over to Incfile's blog and Learning Center, where we have tons of information for all your tax related queries.