Electing to be taxed as an S-Corporation instead of an LLC or sole proprietorship can have significant tax benefits. S-corporations are pass-through entities, meaning that you do not pay any federal taxes on the company level; instead, you pay taxes on the profit from the business on your personal tax return.
While there are varying advantages for any tax entity you choose, the following tax benefits of S-Corporations may make it a suitable option for your business.
You Save On Self-Employment Taxes
Filing as an S-Corporation eliminates a portion of the self-employment tax you pay.
You only pay self-employment taxes (Social Security and Medicare) on the reasonable salary you give yourself.
That means that instead of paying self-employment taxes on 100% percent of your business income (as you would as a sole proprietor or an LLC) you only pay these taxes on a percentage of that income (the amount on your W-2).
For most business owners, this percentage is about 30-50% of their business income; however, we recommend compiling a reasonable compensation report to accurately determine your personal income. Not only is this the safest and best practice for business owners, but this report is also used to defend your compensation should you be audited. (Get in touch with the team at Alfano & Company if you are electing to become an S-corporation and would like a reasonable compensation report for your business.)
Any profits that remain in your business bank account after your reasonable salary is paid and other tax deductions are taken into account are not subject to self-employment tax.
You Can Deduct Your Health Insurance
Once elected as an S-Corporation, you can pay for your health insurance directly out of your business bank account as long as it is included as part of your wages and your spouse is not eligible for coverage under a subsidized health insurance plan.
Although the premiums added to your W-2 are taxable, the amount paid is deductible and the premiums are exempt from self-employment taxes. That could mean thousands in savings!
Just be sure to let your payroll provider know that you want to add the amount of your paid medical insurance added to your W-2. We suggest doing so at the end of every year!
Do you think an S-corporation is right for you? If you’re currently an LLC grossing at least $50,000 year, an S-Corporation election may be the right move for you.
If you’re interested in getting started, set up your appointment with David Alfano, CPA and Financial Advisor. During your free initial consultation call, David will evaluate your current business structure and help you to determine whether an S-corporation is the right fit for you!