If you have an LLC or a sole proprietorship, an S corp election can be a powerful tax planning strategy to minimize your taxes. In this blog and video below, we will discuss S Corp election and how it can be used to minimize your taxes.
We all pay payroll taxes but business owners pay twice the payroll taxes
Besides paying income taxes, we all pay what is known as employment or payroll taxes on our salaries. This includes taxes such as Medicare, Social Security, etc. Now, this 15.3% payroll tax is divided equally between the employer and the employee where each pays about 7.5% of the salary as payroll tax. But when you’re a business owner, you pay the entire 15% on your salary because you’re both the employer and the employee in this case.
What happens if you don’t make an S Corp election?
Now, if you haven’t made the S Corp election, your entire net income is considered your salary. So you pay 15.3 % on all of it. When you make an S corp election, you’re saying, “hey, I’m wearing two hats here!” I am the owner of my business, but I’m also an employee. So, all of my income is not just salary. Some of it is salary. But the rest is my owner’s distribution, which I’m going to take as the owner. So tax me accordingly.
How does an S Corp minimize taxes?
When you do the S Corp election, you pay the self-employment tax of 15.3%, only on the salary portion and the rest of the income passes to you as owner’s distribution, without the 15.3% tax. In this way, you can use an S corp election to minimize your overall taxes, as a business owner.
Next step for you
Before making the S Corp election, be sure to compare the cost of establishing and administering, an S Corp with the tax savings you get from having one. A financial advisor or a tax planner can help you analyze the tax savings and costs and make a recommendation. If you would like to speak with us about financial advice or tax planning, please book an introductory call below.