Reduce the Tax You Pay by Having Your LLC Treated as an S Corp for Tax Purposes

If you want to reduce the amount of tax you pay on your LLC earnings, an S Corporation Tax Election (form 2553) is a necessity. This tax election tells the Internal Revenue Service to tax your LLC business as an S Corporation, which could reduce the amount of income on which you need to pay self-employment tax (including Social Security, Medicare and FICA). This can substantially reduce your tax bill with only a slight increase in administrative overhead for you and your accountan

When it comes to the amount of tax you owe the federal and state government, your income from an LLC is normally taxed similarly to that of sole proprietorship businesses. For a small, one-person LLC, this typically works as follows…

• Your business earns revenue
• You deduct any allowable business expenses
• The amount remaining is your business profit, which you pay to yourself
• You pay self-employment tax of around 15 percent on any profits
• You pay federal tax at various income bands on any profits
• You pay state tax on any profits

An S Corporation Tax Election reduces the amount of tax you pay in step 4, self-employment tax. It has no impact on any other taxes.

Let’s illustrate this with an example.

Under a standard LLC tax arrangement where the income “flows through” to your 1040 tax return and business schedule C, you would pay self-employment tax on all of that $90,000. At approximately 15 percent, the tax on that money would be $13,500. You would still pay standard federal and state taxes on any earnings.

If you choose to be taxed as an S Corporation, you could say that your salary is $50,000 and take the other $40,000 out of your business as a distribution. You would pay standard payroll tax on that $50,000 for a total of around $7,500. You would not pay any payroll or self-employment tax on the $40,000 distribution, saving you around $6,000. You would still pay standard federal and state taxes on both your salary and your distribution.

The S Corporation tax calculator lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution). It will then show you how much money you can save in taxes.

There are a couple of ways you can file form 2553

If you want to complete the filing process yourself,
here are the steps you need to follow:

• Go to the Internal Revenue Service website
• Find the section on S Corporation Tax Elections
• Download form 2553
• Gather the required information for form 2553 and fill it in
• Send the form back to the IRS, typically by mail or fax
• Wait for notification of acceptance of your tax election

Alternatively, The Business Hatchery can take care of your S Corporation Tax Election for you. Just order the service below and we’ll collect all the information we need. We deal with all the forms and filing on your behalf. It’s fast, simple and hassle-free.