The excitement of starting a new business can surely bring on the adrenaline. First, you have a great service or product to sell. Secondly, you are good at what you do. Thirdly, you are finding your groove, and success is rising as you see the $$$’s mounting.
Did you just put out a shingle when you opened your business, or did you set up an LLC (Limited Liability Company)? It is always best to separate yourself personally from your business to protect your assets.
Being Self-Employed may seem quite easy at first, but then the self-employment taxes also rise along with your income. During tax season you will find that filing your 1040, Schedule C, reveals more taxes owed than what you had predicted.
What are the guidelines for knowing when it’s best to make a change in your business strategy or entity? Most tax advisors say that when you cross the threshold of $40,000 in revenue, it is time to reconsider your business model to minimize your tax liability.
Transitioning from an LLC to an S-Corporation offers many tax advantages. You have the option of taking a “reasonable salary” (where you do pay self-employment taxes), and then you take your remaining profits as distributions which are not subject to self-employment taxes. Distributions are only taxed for federal income tax. This is a huge tax savings.
Having an LLC already established by the first of the year makes it easier to transition to an S-Corporation during the year. Making this shift is considered by the IRS as a tax election. Setting up this entity is best done with the guidance and assistance of a Tax Attorney. Form 2553 is filed to the IRS to request this S-Corp tax election. Once your letter is received and approved, you can move forward with NEW books, payroll, and put into place all the benefits that come with having this new business structure.