Did you know that if you have been an LLC since the beginning of the year, you can elect to be an S-Corp for tax purposes anytime within the year, and then have the option to declare your S-Corp status for the full year.
But let’s say that you were late in getting your LLC set up, and its mid-year. Now you realize that your earnings have skyrocketed, and you are desperate for tax strategies. Don’t worry. You can still select an S-Corp tax election mid-year and still get the benefit for half a year.
Wow…how do I do this? First, have a good professional bookkeeper who knows how to transition your books and set up payroll for your S-Corp business. This will enable you to avoid high self-employment taxes, structure a “reasonable salary” and only pay federal income tax on the remaining profits after salaries are paid.
Here’s an example: If you generate $100,000 in operating income, you will want to take a salary of $40,000. You might say, “Well, that’s not enough to live on!” The good news is that all the money you earn is still yours. Now you will take additional money as a distribution. Instead of paying self-employment taxes on the distributions, you only pay your ordinary tax rate. No social security or Medicare taxes are paid on distributions.
The second big take away is that both you and your spouse can set up your own 401k for retirement. The reason for the $40,000 salary is so that you and your spouse can each put away $23,000/yr (withholdings from your monthly salary that IS tax deductible) and then have enough money to pay your FICA and federal income taxes. At the end of the year, before your annual tax filing, your S-Corp will contribute 25% of your salary ($10,000) into each of your 401k. So that year, your tax deductions will be $33,000 for each of you, and the $10,000 paid into each of your accounts is also a tax deduction for your company. And that’s not all the benefits available to you…more to come.