Unlocking Tax Savings: The S-Corp Switch

Want the cliff-notes?

When your business is profiting around $6,000-8,000 per month or more, consistently, it may be time to for you to make the switch to an S-Corp.

If that’s not enough detail for you, keep reading below.

What’s the purpose of an S-Corp?

The purpose  of converting your LLC business to S-Corp status is to save on self employment tax - which is 15.3%. By making your business an S-Corp. your net income is exempt from this extra 15.3% (self employment taxes).

The 15.3% rate consists of two parts:

• 12.4% for social security (old-age, survivors, and disability insurance)
• 2.9% for Medicare (hospital insurance).

But, why would an S-Corp avoid self employment tax?

Under an LLC, ALL of the income that the business makes passes through to the owner, who then claims it on their personal tax return and pays that extra 15.3%.

On the other hand, with an S-Corp, the owner is allowed to take a ‘reasonable’ W-2 salary paid by through the profits of the business. The profits, outside of the salary are exempt from self employment taxes.

Okay, so if I elect an S-Corp, what is a ‘reasonable’ salary?

Well, there’s not a completely straightforward answer for this, but it depends on the net income and the industry your business is in. The general thought is that your salary should be roughly half to 2/3 of your estimated yearly earnings.

However, that’s not a concrete measurement and is subject to your industry standards and should be supportable.

I’m convinced, how do I convert my LLC to an S-Corp?

1. Head to the IRS website and look for Form 2553. Fill that out with the proper information and reference the instructions provided by the IRS, if you have any questions.
2. Once you’ve completed the form, drop it in the mail to the IRS. Be sure to follow up multiple times to ensure that is has been received by calling them at this number: (800) 829-4933.

Another item to note - you must submit Form 2553 prior to April 15 of the current tax year, otherwise, the S-Corp election will not take effect until the following tax year.

Key Reminder

After you’ve submitted your form, be sure to confirm with the IRS that it has been received - the best method we recommend is to simply call and get in direct contact them. Their number is (800) 829-4933.

Once the IRS receives the form and does what the IRS does, you’ll receive the following letter (shown below) confirming that you’re business is now an S-Corp and you can start enjoying the self employment tax savings. Provide this letter to your accountant so they can file your business as an S-Corp successfully.

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