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Marie Soukup, Alpine Point Collective, Port St. Lucie, Florida
Business entities come with a variety of tax benefits. Depending on your business, you could save thousands in taxes by taking the S Corporation election. There are several steps involved. To be treated as an S Corp, after forming a corporation or LLC, the shareholders must make an election with the IRS. In addition, you will need to pay yourself a reasonable salary as a W2 employee and set up payroll and withholding. If your business is profitable, your payroll taxes and income tax from this salary may be offset by the savings you achieve on the self-employment tax. Important: for existing entities, the election must generally be made by March 15th of the year the election is to be effective.
In addition, a business generally can deduct the expenses directly related to its business activity — think advertising expenses, mileage, or professional services like what Block Advisors provides. Business credits for things like renewable energy, employee retirement plan, or health insurance may also be available depending on your circumstances. These credits would reduce a tax bill dollar for dollar.
The decision to form a business entity and take an S Corp election is an important one that includes many additional considerations. For example, as the owner of a business, you also need to ensure your business financials are maintained and updated (if you’re not already) and stay on top of annual business filing and other requirements depending on your state and industry. You may want to seek the advice of an attorney to evaluate these considerations. Our products, services, and advice are not a substitute for an attorney, and we do not provide legal advice or perform services performed by an attorney.
Here’s a great article detailing potential incorporation tax benefits for small businesses.
How you choose a business structure depends on a lot of things. Each structure comes with its own specific rules, requirements, and considerations. The most common types of businesses are:
Read on to learn more detail about different business structures.
An EIN is an employer identification number and is needed in certain situations. For example, partnerships and corporations are required to have an EIN. Sole proprietorships and LLCs that have employees, pay excise tax, or contribute to a retirement plan also need an EIN. EINs are included with all of our packages.
An S Corp is a tax election for a small business corporation or LLC that allows the company to pass its income, loss, deductions, and credits through to its owners. The company itself is not subject to tax. And that income is subject to the shareholder’s individual tax bracket, which may be lower than self-employment tax.
To take an S Corp election, you’ll need your original business filing documents (either as an LLC or corporation) and an employee identification number (EIN). For an LLC, you will need to have “checked the box” to be taxed as a corporation. You will then file Form 2553, Election by a Small Business Corporation, with the IRS. If you select our S Corp product, we’ll take care of that for you.
While an S Corp election can help reduce your tax liability, there are a few extra steps you’ll need to do as part of your business operations. One of the biggest is making sure you’re drawing a reasonable salary and filing the necessary quarterly payroll and tax forms. You’ll also need to ensure your business financials are maintained and updated, as well as annual business filing requirements depending on your state and industry.
An LLC (or limited liability company) is popular among business owners because of the versatility that often comes with the LLC business structure. LLC owners typically have less formalities imposed on their business than other entity structures. If the LLC does not make the S Corp election, default tax rules mean LLC members must pay self-employment tax. If the LLC makes the S Corp election, working LLC members are treated as employees and their wages are subject to employment taxes. The LLC business structure is often recommended for smaller organizations.
Check out this article to learn how an LLC is taxed.
Often a sole proprietor means someone who operates a business but reports the income on their individual taxes and doesn’t have a separate legal entity. LLCs are a legal entity that can provide personal liability protection, even if still owned by a single person. In other words, it can protect the owner’s personal assets from certain business debts or liabilities. Sole proprietors and single member LLCs are taxed in the same way, unless another tax structure (like an S Corp) is elected.
Most traditional corporations like the ones that are traded on the stock market are C Corp. A C Corp is a tax status that is subject to double taxation — the C Corp pays tax on its income and the shareholders pay tax on the dividends they receive from the corporation. The corporate tax rate is less than the individual tax rate.
A nonprofit is a business structure that has requested tax-exempt status from the state and/or IRS. The nonprofit does not pay tax on its income provided the income is from activities associated with the nonprofit’s charitable purpose. Examples of nonprofits can range from charities to your kids’ local sports club.