Mainly because it lets you save potential medicare and social security taxes. Here's a simplified example:
See the following table for the simplified numbers assuming this is the Owner's sole source of income for the year. Assumptions: the owner was single, had no other sources of income, took $6,300 standard deduction, took $4,000 of personal exemption, and no unemployment considerations.
|LLC's Net Profit||$100,000.00|
|Self Employment Tax Owed||($14,129.55)|
|Federal Income Tax Owed||($16,450.00)|
|Net Taxes Owed||($30,579.55)|
See the following table for the simplified numbers assuming this is the Owner's sole sources of income for the year. Assumptions: the owner was single, had no other sources of income, took $6,300 standard deduction, took $4,000 of personal exemption, and no unemployment considerations.
|LLC's Net Profit before payroll||$100,000.00|
|LLC's EmployER payroll expense (50k x 0.0765 + $50k)||($53,825.00)|
|LLC's Net Profit after payroll||$46,175.00|
|Total Income to be taxed for regular tax||$96,175.00|
|EmployEE's payroll taxes (50k x 0.0765)||($3,825.00)|
|Regular income tax owed||($13,438.00)|
|Net Taxes Owed Personally||($17,263)|
This makes for an approximate difference in taxes in the amount of 30,579.55 minus 17,263.00 for a savings of: $13,316.55. This means if your costs of implementing payroll and complying with federal and state employment laws is less than this number (it most likely is), an S-Corporation may make great sense. Note that the numbers are always different in reality and the taxable amounts and rates change from year to year. But I hope this illustrates the substantial tax savings available with an S-Corporation.
A caveat for professionals that have high earning potential: you can't just set the salary portion of an S-Corp as low as you want; if you get audited then the IRS will argue that you should have been paying a higher salary for your position. Be sure to ask your tax professional how to set your salary versus distribution ratio for your S-Corporation.
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Law Office of James Ryland Miller, PLLC
1098 Ann Arbor Rd W #377
Plymouth, MI 48170
Mr. Miller is physically located in Plymouth MI and meets with clients in Arlington TX by appointment only.