Learn the difference between an LLC and S-Corp for your business. An S-Corp is valuable for many reasons, including liability protection, tax advantages & sheltering assets.
One of the most powerful tools available for small business tax reduction is to utilize an S-Corporation instead of a Schedule C or Sole Proprietorship.
Let's cover some of the S-Corp Basics to help you understand why it's so important.
15.3%
Social Security tax is 12.4%, and medicare is 2.8%. Up to the social security limits, you'll owe 15.3% self employment tax on what you earn.
Sole Prop
100% of the net income from a sole proprietorship is subject to the self employment taxes or medicare & social security taxes.
S-Corp
You can elect to be taxed as an S-Corp, where your company will pay you a salary, and then you take a distribution as the owner.
How are you Taxed?
Let's discover how the self employment tax plays out.
100% Subject to SE Tax up to Social Security Limits
The 15.3% self employment tax is comprised of social security & medicare tax. After paying self employment tax, you will still pay income taxes.
12.4% social security tax is applied on all net profits up to the social security limit. That limit is $147,000 in 2022 and tends to go up to help fund the social security liabilities.
2.8% Medicare Tax is owed on all of your schedule C income.
If you made $100,000 in net profit, you'd owe about $15,300 - without taking into consideration the QBI deductions or other nuances.
Sole Prop Taxes
S-Corp Taxes
S-Corp Income is Split Between Salary & Distribution
After electing to be taxed as an S-Corp, your income will be split between a reasonable salary and an owners distribution.
Distributions are NOT subject to the self employment taxes.
Your payroll is subject to self employment taxes.
The lower the salary, the lower the taxes, so the IRS declares you must take a "reasonable salary".
S-Corp Taxes
Maximizing an S-Corp
You'll want professional guidance to get the most of out the S-Corp
The goal is to take the lowest reasonable salary possible.
We must make wise decisions and maximize the benefits without breaking the law.
Pro-active, year-long guidance and planning is necessary to ensure you're getting the most out of an S-Corp.
