ELECT S CORPORATION STATUS TO MITIGATE FEDERAL PAYROLL TAX BILLS
There are many factors to consider in electing S corporation status for your business. One of those factors is the impact on federal payroll taxes. 415 Group supervisor Michael Harvey, CPA, MSA, breaks down the benefits of starting your business as – or electing to be taxed as – an S corporation.
In many cases, incorporating your small business or limited liability company (LLC) and electing S corporation status can greatly reduce your overall federal payroll taxes.
At 415 Group, I’ve helped various small business owners through the process of electing S corporation status, specifically for this purpose. Even better, I’ve seen the massive results on their tax returns.
When your business is structured as an S corporation, the payroll taxes are only imposed on what you pay yourself in wages for services performed. Anything beyond your wages, such as profits from the business itself, will not be subject to FICA and Medicare taxes.
If you are self-employed as part of your unincorporated small business, you’re both the employer and the employee. So, you pay both sides of payroll taxes on your personal income tax return. This amount is currently at 15.3% of your income—which can quickly become quite large since all your net self-employment income is considered when calculating the taxes. Electing to be taxed as an S corporation can help mitigate some of this.
What happens when you have an existing business that you’d like to change to an S corporation?
Well, it depends on how your small business is currently structured.
If your business is a single member LLC with an individual as the single member, you’ll need to file Form 2553 with the IRS for approval to be treated as an S corporation. Once approved, you’ll find out when the IRS will start recognizing your business under the new status.
If you don’t have a formal structure, you will need to start by either incorporating your small business or forming an LLC. You’ll then file Form 2553.
At 415 Group, we advise our clients on how to formalize their business structure. For example, we may recommend working with an attorney to cover all legal bases and ensuring the wages you elect to pay yourself are reasonable under IRS standards. Then, we help complete and file Form 2553 for approval.
There are reasons you may not want to switch to an S corporation. For example, there are many strict rules that come with this type of business entity. If they are violated, the IRS may no longer treat your business as an S corporation – and instead treat it as a C corporation, which is entirely different.
Switching to an S corporation to save on payroll taxes can be beneficial. Be sure to work with a trusted advisor before jumping to make the switch.
Contact 415 Group today to find out how we can help your business.