June 18, 2020
5 Reasons the Self-Employed Should Consider Converting to an S-Corp
There are many benefits to the S-Corp structure but today we'd like to outline the five most beneficial reasons to do so:
Just by converting from a sole prop or LLC into an S-Corp, you change the way the income from the company is taxed on your personal return. In the former status, you would pay a 15.3% self-employment tax on top of your personal income tax for any net income that you have from the business, while in an S-Corp those self-employment taxes are eliminated and through the payroll, you actually shift half of the employment tax liability to the business as an expense and the net income that passes through to your 1040 is taxed at a different rate than for self-employment. In addition, you have likely prepaid most if not all of your 1040 personal tax liability via payroll withholdings, meaning your end-of-the-year tax bill is not only significantly decreased in amount but likely already funded. No big payments each quarter and year to the IRS!
Benefits are one of the best um…. benefits to be an S-Corporation. We have actually written a blog post at length about this but in short by running health insurance and retirement benefits through the company payroll for yourself you can knock your net income down considerably as well as create personal tax savings in the form of deferred compensation in a 401(k).
Personal asset protection
While you do receive limited protection as an LLC by its very nature by electing to be an S-Corp you solidify the division between your personal finances and business activity. The entity designation of S-Corporation is a signal to state and federal agencies that your business is a fully-fledged entity that should be treated as different than your personal financial activity and as such further guards from audits and legal judgment that may occur.
We don't like to admit it as a society but in reality, a corporation is a more trusted source of commercial activity these days than individuals. By having an actual company that is registered and licensed by state and federal authorities you are communicating that you are a serious business with real services to offer. You are also communicating that you have taken the necessary steps to conduct your business in accordance with state and federal regulations and that you have made the effort to properly manage your business with correct accounting and tax processes.
Less risk of getting an audit
Finally, You are less likely to be audited by state or federal agencies as an S-Corporation: this is a statistical fact. S-Corps are 4,000% less audited than Schedule C. You drop your business's chance of being audited merely by filing a form 2553 for your LLC. That level of risk management simply by filing a form and properly managing your S-Corp financials is better than any insurance policy or audit-proofing found anywhere.
Not a Formations customer yet?
talk to one of our representatives to see how we can help get your small business the benefits above, at a low monthly rate.