There is some good news in the world of taxes!

If you are a Limited Liability Company (LLC), you may be able to save money on your taxes by electing S Corp status.

The information below will provide you with a good overview of the pros and cons of the S Corp election. But remember that each business is unique and needs to be considered individually. Check with your CPA or tax preparer to confirm the particulars for your business.

Limited Liability Company (LLC)

What is an LLC?

- - An LLC is a business structure authorized by state statute.

What are the Advantages of an LLC?

- - Liability protection for the owner.
  - Inexpensive to set up.
  - Simple to maintain.

How is an LLC Taxed?

- - An LLC is a ‘disregarded entity’ for tax purposes.
    - A Single-Member LLC is taxed like a Sole Proprietor.
      - Your business taxes are filed using Form 1040 and Schedule C.
    - A Multi-Member LLC is taxed like a partnership.
      - Your business files IRS Form 1065, which is considered an ‘information return.’
      - Each member owner receives a Schedule K-1, reporting their share of the business’s profit or loss.
  - You pay personal income tax based on the profit of your business.
  - You pay 15.3% in self-employment tax on the profit of the business.
  - If you are a Single-Member LLC, you are not taxed on Owner Distributions, provided they do not exceed the amount of your investment in the company. If you are a Multi-Member LLC, your Partnership Agreement determines how distributions are handled.

S Corporation Election

What is an S Corporation (S Corp)?

- - An S Corp is a tax classification
  - An LLC can elect to be taxed as an S Corp, while maintaining all of the other aspects of an LLC.

When to Consider an S Corp Election?

- - When your business is making an annual profit of $80,000 per year or more, an S Corp election usually lowers your tax bill.
  - If your business income is a lot higher than the ‘reasonable salary’ (more on this later) for your work, you will pay less in taxes with an S Corp election.

Advantages of an S Corp Election

- - With an S Corp election, You will pay less in employment taxes.
  - Employment taxes are ONLY paid on the amount of the salary paid to the owner.
    - As an LLC, you pay 15.3% in employment taxes on the entire Net Income of your business.
  - As an employee, you will pay 7.65% in FICA tax.
  - The company will pay the other 7.65% –AND can deduct that expense.

Some Caveats

- - Each business and situation is unique. Be sure to discuss the advantages and disadvantages of electing S Corp status with your tax advisor.
  - Not every state recognizes S Corp status for state taxes. Be sure you understand the implications for state tax.
  - Tax filings are more complex. You will file IRS Form 1120-S.
  - Failure to pay a ‘reasonable salary’ can bring increased scrutiny from the IRS.

How Does it Work?

- - The owner must be paid ‘reasonable compensation’ for the responsibilities held and duties performed.
    - The salary should be what an employee would be paid to perform the same duties.
    - Tip: Use an online salary site to determine the ‘going rate’ for your position.

How to Elect S Corp Status

- - You must complete IRS Form 2553, Election by a Small Business Corporation
  - The Company must meet the following requirements:
    - Must be formed in the United States
    - Cannot have more than 100 owners
    - Only individual U.S. residents can own interests
    - There can only be one class of owner – no preferred shareholders or members.
  - Deadlines:
    - For businesses with tax years beginning January 1, the deadline is March 15th,
    - For new businesses, or businesses with a non-calendar fiscal year, you have two months and 15 days to elect S Corp treatment for the entire tax year.
    - If you miss the deadline: S Corp status will only apply for the remainder of the tax year. This means you will have to file TWO tax returns for that year.

After Electing to be Taxed as an S Corp

- - You will use IRS Form 1120-S to file taxes for your business. (Multi-member LLCs will still report their share of income, deductions and profit on Schedule K-1)
  - Update your W9 to show the S Corp election. Provide the updated W9 to appropriate parties.

If your business qualifies, an S Corp election can save you thousands per year in employment taxes! Be sure to talk to your tax preparer to see if this change could benefit your business.

When to Consider an S Corp Election