The S-Corporation Advantage for Active Businesses

As we discussed in an earlier article, the S-Corporation is an available tax election for LLCs, both single-member and multi-member, provided that they comply with the S-Corporation restrictions.

Why should I care about S-Corporation taxation?

Mainly because it lets you save potential medicare and social security taxes. Here's a simplified example:

For a Disregarded Entity:

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.

Description Dollars
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)
For an S-Corp

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.

Description Dollars
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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