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Here is How You Can Save Thousands on Taxes

For those with a C-Corporation or who are sole proprietors, you can reduce your federal self-employment tax by electing to become an S-Corporation. 

 

An S-Corporation is a corporation where corporate income, losses, deductions, and credits are passed through to the shareholders for federal tax purposes, and you can be an employee of your own business — even if you're the only one in the business. 

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Everyone, self-employed or an employee, pays Social Security and Medicare taxes. If you are an employee, you are only responsible for paying 7.65% of these taxes, and your employer pays 7.65% of the balance. However, when you're self-employed, you must pay both portions of this tax, which amounts to about 15.3%, unless you file your business as an S-Corporation. 

PAYROLL TAX BURDEN AS AN EMPLOYEE

7.65%

7.65%

Employee's Tax Burden

SELF-EMPLOYMENT TAX BURDEN AS AN ENTREPRENEUR

15.3%

Employer's Tax Burden

So, how can you save thousands on your tax burden? 

You file your business as an S-Corporation entity. 

Being Taxed as an LLC, C-Corp or S-Corp

All LLCs and sole proprietors pay self-employment tax on taxable business income. However, if you elect to be an S-Corp, you pay yourself a salary via a paycheck, and as your wages are subject to self-employment tax,  the remaining earnings of your business are NOT. 

 

Liability of Owner 

Management 

Taxation 

Double Taxation 

Self-Employment Tax 

Pass-Through Tax Treatment

LLC 

Members are not typically held liable. 

Members can set up their structure as they choose. 

Not taxed at the entity level, income is passed through to members. 

No 

Salary is subject to self-employment tax 

Yes 

C- Corporations 

Shareholders are not typically held liable

Shareholders elect directors who manage business activities 

Taxed at the corporate rate, and dividends are taxed at the individual level or distributed to shareholders. 

Yes, taxed at the corporate level and then again if distributed to shareholders in the form of dividends.

Salary is subject to self-employment tax 

Yes

S- Corporation 

Shareholders are not typically held liable

Shareholders elect directors who manage business activities 

No tax at the entity level. Income is passed through to the shareholders. 

No

Salary is subject to self-employment tax, but shareholder distributions are not. 

Yes

Local Business Partners

For example 

If your business has net income of $70,000 and you’re taxed as an LLC, you will owe nearly $10,000 in self-employment tax.

 

However, if you elect to be taxed as an S-Corporation and take a $40,000 salary with the remaining $30,000 being a distribution to you or you keep it in the business, you pay only $6,120 in self-employment tax, saving you nearly $4,000 in self-employment taxes!

Important Notes about S-Corps 

Those with an established LLC can file the necessary paperwork (Form 2553) with the IRS and be taxed as an S-Corp.  

In addition to filing your personal tax return on April 15th, your annual Federal S-Corporation tax return is due on March 15th.

Having an S-Corp does come with additional costs. Depending on your CPA, these fees may include payroll and tax filing fees.

​Your savings calculation is only valid if your business net income is $147,000 or less. For those with higher projected net income, give us a call for a specialized tax savings projection. 

Is an S-Corp right for you? ​ For more information, call to schedule your S-Corporation Consultation!

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To improve the quality of life of our clients, team, and community. Exclusive service with big firm expertise, we offer business owners in Fresno and throughout California holistic CPA services. We are your team of CPAs, accountants, tax managers, and business advisors.

CONTACT US 

7110 N. Fresno Street, Suite 200 Fresno, CA 93720 ​

 

Tel: (559) 472-7370

 

Fax: (559) 472-7371 ​

 

info@thegarabediangroup.com

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