Have you hit your financial milestone as an LLC? Are you now in a position where you’re getting a net income?
If so, there are things you can do to help you save on your taxes. Because you could actually be overpaying in tax to some degree, depending on your situation.
Now, if you're in the camp of growth and you have that net income to speak about, switching to an S-Corp tax strategy vehicle is always worth considering.
Starting as an LLC
You can go straight into an S-Corp, but the common vehicle is starting as an LLC. Then the IRS elects to have that LLC taxed as an S-Corp. This is another cost if you don't have an LLC in place.
The LLC, when it's not an S-Corp, is a legal liability protection. It gives you the flexibility to get into an S-Corp situation easier when it's appropriate to do so, and apply for the S-Corp election and make it retroactive back to three years. If the LLC already exists, you have the flexibility to implement tax strategies much easier. Whereas if you didn't have it in place, the S-Corp is only effective from the earnings from the date the LLC is established.
When to Switch to S-Corp
The S-Corp status is for those companies that are actually making a net income. So if you're not in a net income position right now, switching to an S-Corp is not going to benefit you.
On the federal level, consider switching to an S-Corp taxation status once your net income is around $30,000 to $50,000.
Filing for a Separate Income Tax Return
If you're a single-member LLC, you don't have to have a separate tax return. You just record it on your individual tax return, which is your 1040. But if you opt to be taxed as an S-Corp, you have to have a separate tax return that costs money.
In addition, you'll also be required to pay yourself a salary. It means cutting yourself a check and filing your payroll tax returns and your W-2. But looking at how much you’ll be saving is worth the additional cost because the net impact is still huge.
How You Can Save
The basic premise is that you're allowed to take the net income of your business and carve out what portion is subject to Social Security + Medicare, and what portion is not. Social Security + Medicare is of 7.65% for the employee, and it's matched by the employer.
If you adopt the S-Corp strategy, it means you’re going to be saving 15.3% of every dollar of your business.
If you want to learn more about how an S-Corp can save you big money on tax, check out 028: How An S-Corp Can Save You Big Money On Tax
