How you can avoid double taxation With An S-Corp Election
What Is an LLC?
A limited liability company is a popular choice for small business owners who want a more formal business structure than a sole proprietorship or partnership.
An LLC is taxed in the same way as a sole proprietorship. If you’re an LLC owner who works in the business, the Internal Revenue Service (IRS) considers you self-employed. You’ll file an LLC tax return on Schedule C of your personal return, and you’ll pay self-employment taxes of 15.3% on income up to $142,800 plus income taxes (approx.15-30%) on 100% of the company’s profits.
But LLCs can also choose to be taxed as an S-Corporation. Most LLC owners save money by electing S-Corp tax status to avoid paying self-employment taxes on up to 70% of their net income.
What Is an S-Corp.?
An S-corp is more of a tax status than a business structure. S-Corps are pass-through entities for corporations (LLCs). This means that certain income and losses from the business “pass-through” on a Schedule K-1 from the 1120-S Business Tax Return onto the shareholders’ personal 1040 tax return.
Because the business income is reported on each shareholder’s personal tax returns based on their ownership percentage of the business, it is only subject to tax at their personal marginal income tax rate. This is one of the main advantages of an S-Corp; avoiding double taxation.
S-corps have other tax advantages, too. If you have an S-Corp and are below a certain income threshold, you may qualify for a 20% tax deduction on qualified business income on your federal income tax return. The QBI income threshold for the 2021 tax year is $164,900 for single filers and $329,800 for married couples who file jointly.
For most small businesses, there are few drawbacks to S Corporation taxation. The costs of electing to be an 1120-S-Corp can include:
- Payroll service of approximately $85/month
- Professionally prepared Form 1120-S Tax Return $425-750
- Texas has no annual LLC or State Report fees. Franchise taxes are due past the threshold of $1,180,000
Next Step Enterprises LLC recommends any LLCs or sole proprietorship with a net income of at least, $25,000 make the S-Corp election. At this level of income, the benefits outweigh the time and expense.
EXAMPLE: $50,000 Net Business Income. A sole proprietor would pay $7,650 in taxes. An S-Corporation would pay $3,825. The tax savings is $3,825. These calculations are based on owners paying themselves 50% of income as wages.Calculate your potential tax savings at: https://www.incfile.com/s-corporation-tax-calculator