The biggest difference between S Corporations and LLCs (partnerships) is the ability to minimize self-employment taxes as an S Corp. In an S Corp you are considered a shareholder and an employee, and therefore must include yourself on payroll. As an employee, you must pay yourself a “reasonable wage.” All wages paid in an S Corporation are subject to both federal and employment tax. However, your taxable revenue does not include wages paid. For instance, say you made $100,000 in profits and paid yourself $100,000 in wages. You’d end up in the same tax situation as a partnership or corporation as everything would be subject to federal and self-employment tax. However, if you paid yourself only $40,000, the remaining $60,000 would not be subject to self-employment tax. Given the current rate of 15.3%, that’s $9,180 in tax savings.
There are many factors to be aware of when considering an S Corp election. The key element to determine when to make the conversion, is if you have sufficient profits in excess of a reasonable salary. If so, the strategic move to an S-Corp could yield significant tax savings.
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