S Corp Tax Filing | The Difference and Tax Benefits

Are you a Sole Proprietorship or LLC entity looking to optimize your tax strategy? If you haven't explored filing as an S Corporation, now is the time to consider this potentially game-changing move with your CPA. Switching to an S Corporation can offer significant tax benefits based on your annual earnings, providing a structured approach to minimize self-employment tax burdens.

As an LLC and/or Sole Proprietorship, your company is being taxed a self-employment tax of about 15.3% on your total income. However, If you were to file your taxes as an S Corporation instead, the Business Owner could be treated like an employee and paid a salary.

• A general rule of thumb that S Corp Business Owners will use is the 60/40 rule - where 60% of business income is paid out in salary and 40% in distributions.

Why is this important? Well, it allows you to reduce the 15.3% self-employment tax from the total company income to just the Business Owner salary you’re paying yourself!

So, with that, let’s take a look at an example of just how impactful this change can be on your bottom line.

SELF-EMPLOYMENT TAX EXAMPLE:

LLC — This is taxed similarly to a sole proprietorship, which includes a self-employment tax of about 15.3% on your TOTAL income.

Example: If you net $150,000 per year as an LLC, you are taxed almost $23,000 towards self-employment tax.

• $150,000 x 15.3% = $22.950

S Corp—The business owner is treated as an employee and paid a salary. This, in turn, reduces the self-employment tax of 15.3% to ONLY be calculated off the Business owner’s annual salary.

Example: If the business nets $150,000 annually, and you pay yourself a salary of $90,000, you would pay approximately $13,770 towards self-employment tax.

• $90,000 x 15.3% = $13,770

By making this simple switch, this Business Owner could save close to $9,200 per year In just self-employment tax alone!

So you might be thinking to yourself...what’s the catch? Filing as an S Corporation is more expensive to have your CPA execute. There is additional filing that needs to be completed, and therefore more hours that your CPA will have to work/charge for.

The general rule of thumb is that an S Corp tax savings will outweigh these additional CPA filing charges if the business brings in $200,000+ in revenue each year and/or profits approximately $40,000 or more annually.

ADDITIONAL S CORP BENEFITS:

• Group insurance is another write-off benefit an S Corporation can leverage. It can be applied as a tax-deductible expense for corporation employees but cannot be used for members of an LLC.

• An S Corp allows tax-free non-dividend distributions. Distributions can be taken as needed by the Business Owner and reduce Social Security and Medicare taxes. As a reminder from earlier, a Business Owner will typically apply the 60/40 rule, with distributions amounting to 40% or less of a company’s total earnings.

• Last but not least, an S corporation can typically take advantage of additional deductions that aren’t applicable to Sole Proprietorships or LLCs. Depending on your business and industry, your CPA can help you identify what these may look like.

If you're ready to take control of your tax strategy and explore the benefits of filing as an S Corporation, equip yourself with comprehensive insights! Access our Business Owner Tax Playbook here to become well-versed in taxation, enabling you to engage in meaningful discussions with your CPA and unlock substantial improvements to your bottom line.

All the best!

Jen

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