Tax Benefits of Using an LLC Taxed as an S Corp - Sherman the CPA

hey everyone sherman the cpa here today i want to help you save on taxes by explaining the benefits of using an llc tax as an s corporation electing escort status as an llc is one of the most popular tax strategies to help small businesses reduce the amount of taxes that they owe and by the end of this episode you will understand how llcs are taxed how s corps can cut some of those taxes how to elect s-corp status and even more creative ways you can use to use an s-corp to get even more tax write-offs so if you own a business go ahead and drop me a comment below and let me know how your business is currently organized and please be sure to like and share this video to help more business owners like yourself pay less [Music] taxes all right so an llc is the most popular entity type out there especially for new business owners it is very easy to set up an llc and it provides some really strong protection from a liability perspective but as you start earning more money in your llc the amount of money you pay in taxes can be a lot to bear and switching to an s-corp could provide some huge tax advantages so let's dig deeper into this for just a second here there are three main types of taxes that you will pay as an llc federal taxes state taxes and self-employment taxes the federal and state taxes you will pay are based on your total personal income which includes your share of business income and all other forms of income that you receive federal tax rates can be as high as 37 percent of your income and the average state tax is currently around 5 so already your business income is subject to up to 42 in taxes and that does not even include self-employment taxes now this self-employment tax is an additional 15.3 tax on your business income it is meant to replace the 7.65 medicare and social security taxes you would typically pay as an employee at a company except since you own the business you must pay both the employer and employee share of those taxes which equals 15.3 percent for example if your llc earns 100 000 in income then you would pay fifteen thousand three hundred dollars in self-employment taxes and that does not even include the federal and state taxes you would pay on that income which could easily add another twenty thousand dollars in taxes alone so as you can see the amount of taxes you paid to uncle sam can skyrocket if you do not put a solid plan in place i mean imagine working your butt off to earn five hundred thousand dollars in revenue which results in one hundred thousand 000 in profit only to split nearly half of your profits with uncle sam but fortunately there's this little tax status in the tax code called s corporation and an s corporation does not have to pay any self-employment taxes at all which can save you thousands of dollars in taxes so in the same example you would have saved a large part of the fifteen thousand three hundred dollars you would have paid in self-employment taxes as an llc if you elect s corp status however as an s-corp you do have to pay yourself a reasonable salary which is subject to payroll taxes including social security and medicare taxes so wait a minute here as an escort you still have to pay social security and medicare taxes on your wages which is what the whole self-employment tax is for anyway so you're probably wondering well why would anyone become an s corporation then well as an s corp you control the salary you pay yourself and typically that salary is going to be much lower than the income your business earns which also means you will pay less taxes for example as an llc you would pay fifteen thousand three hundred dollars in self-employment taxes on one hundred thousand dollars in business income but as an s corp you would only pay these taxes on your wages so if your business earned the same amount of income but you paid yourself thirty thousand dollars in reasonable wages then you would only pay about forty six hundred dollars in similar taxes which is just fifteen point three percent of thirty thousand dollars so in that case you would save over ten thousand dollars in self-employment taxes by switching to an s corporation now it is important that you know that an s corporation is not a legal entity like an llc or c corporation it is simply a tax status granted by the irs you can still remain an llc for legal purposes and choose to be taxed as an s corporation for tax purposes but you must have an llc or corporation in order to elect this tax status so if you are running your business as a sole proprietor or general partnership then you would need to become an llc or c corporation in order to take advantage of this special tax status and if you are then all you would have to do is fill out form 2553 with the irs to elect s-corp status with that said let's go ahead and have some fun here and talk about some scenarios in which an s-corp can be used to take even more tax write-offs now the simplest scenario to using an s-corp is to just elect s-corp status as an llc to eliminate your self-employment taxes but what if you own multiple companies or what if you own one company with various partners well in that case you may choose to create a separate s corporation to own your companies in this case 100 of the income you are entitled to will come into your s corporation and then you can use the s corporation to avoid paying self-employment taxes on the portion of the income that is attributable to you this way all of your business income will flow through to your s corporation and you only have to worry about 1s corporation for the work you do for all of your companies or if you have multiple partners then each partner can maintain their own s-corporation that way you will only have to worry about paying a reasonable compensation for one entity instead of for multiple entities or multiple partners and since you are now running your own s-corporation you may be able to find even more tax breaks for example you may find it easier to deduct the business use of your vehicles or take the home office deduction through an s corporation you own instead of trying to split it through multiple companies or split your deductions up with different partners or perhaps you could take advantage of a solo 401k or sep ira which is a retirement account that allows you to deduct up to 58 000 from your taxable income now technically you cannot use a solo 401k or sep ira if you have employees but since you now have a separate company for your s-corporation which let's say has zero employees then now you can take full advantage of these types of plans inside of that company anyway as you can see here with a little bit of creativity you can use an s corporation to save more money on taxes and take advantage of even more tax write-offs let me know what you're thinking about this in the comments below and as always thank you for watching i'll see you in the next episode

Channel: LYFE Accounting

Views: 14,398

Keywords: lyfe accounting, llc taxed as an s corp, llc vs s corp, tax benefits of llc, tax benefits of s corp

Id: S9tNQOnf-NE

Length: 8min 15sec (495 seconds)

Published: Thu Jan 13 2022