What’s an s-corp? And why would a business become one? Will becoming an s-corp be a good fit for my business?
We get LOTS of questions about this topic. Let's dive in today.
So, should your business become an s-corp?
Right off the bat, let's cover some basics:
An s-corp is simply the way your biz entity is set up, especially for payroll and tax purposes.
There are two ways to become an s-corp:
You can either file as an s-corp when you first file with the secretary of state, or you can start as an LLC and later elect s-corp status for taxes.
Now let's get a little more in-depth:
What’s the difference between an LLC and an s-corp?
As far as running your business on a day to day basis, there's not a whole lot of difference between the two. Where the major difference comes in is in how the business owner is paid.
In an LLC, a business owner is not on payroll. But an s-corp is different: the owner actually puts himself or herself payroll – and then pays themselves as if they were their own employee.
Taxes are a big difference
If a business has a net profit of over 30,000, we recommend the business set up as an s-corp. Why? Setting up as an s-corp will allow you, the business owner, to put yourself on payroll – and thus pay less in taxes.
That pay is deducted from the business’s net profit, and the total amount the business will need to pay in taxes will decrease.
In an LLC, on the other hand, owners often pay themselves in “owner draws” – just taking money out of the business to pay themselves. Formally putting yourself on payroll allows you to write off that money.
Another key difference is that in an LLC, all remaining income after deductions is subject to a self-employment tax. But in an s-corp, your profit is taxed as investment income. Any money left over is treated as an investment in the business, rather than personal income.
Are you considering filing as an s-corp?
Then it’s time to start planning out your business tax returns!
Coming in to talk to an Accounting Plus tax specialist can help you find the smartest way to round out your year and go into tax season fully prepared for what’s ahead. Give us a call today to set up a consultation.