By Mark Oldberg: November 9, 2017: Video

 

 

 

A lot of small business owners don’t know that an LLC can make the same election that corporations can to be taxed under the S-corp tax rules. The general idea behind doing this is to save on payroll taxes.

In a normal LLC, all your profits (income minus expenses) flow through to the owners tax returns and they pay income and payroll taxes (social security, medicare) on that entire amount. With S-corp taxation owners are paid a reasonable salary based on their work like normal employees, which they have to pay income and payroll taxes on. The rest of the amount is then considered a “distribution” which is only subject to income tax, not payroll tax. That can save you a few thousand in taxes.

Remember though that it has to be a reasonable salary, a doctor cannot pay himself only $20k and call the other $180k a distribution. He would get busted by the IRS for that.

Now the downsides of this is that you will now have to worry about filing the tax withholdings like a normal employee so more paperwork is required and you have to make sure you are doing the amounts correct. If you already have employees it shouldn’t be a big problem but if you are only one person it will be adding some new complexities to your business.

Take a look at this way of structuring your business. You might just save yourself a decent chunk of change.  

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