And now is a good time of year to consider making the change, since the new year is a convenient effective date for the "S-Corp election". There's still plenty of time to get things in order before January 1st.
The S-Corp election is actually fairly straight forward, but you'll want to get assistance from your tax accountant or attorney to make sure everything is done correctly.
The largest change may be a change in how you (the owner) gets paid. Instead of the guaranteed payments you're currently getting, with the S-Corp election, you will be paid a salary through payroll.
If you don't currently have paid employees, payroll may be a hassle to get set up, but there are plenty options. If it's just you, you may want to look into one of the do it yourself payroll software options. Or, if you use a bookkeeper, they should be able to get it going for a small fee. Whatever option you choose, be sure to pay your payroll taxes on time!
As far as ordinary income taxes, similar to the LLC, the S-corp is also a "flow thrugh entity". This means the business taxes are reported on the owner's 1040 tax return. There is no double taxation as with a "regular" C-Corp. Just as your LLC, the S-Corp completes an entity tax return (on a form 1120-S instead of the LLC's form 1065). Also the same as your LLC, you will get a K-1 from the S-Corp which contains the information to report on your 1040.
The real trick of the tax savings is that you pay self employment (payroll) taxes during the year on your salary but not on your business' year end net income (as you do with an LLC). With the S-Corp. there is no end of the year self employment tax calculation on your 1040. The more profitable your LLC is, the larger the tax savings is to you. One requirement is that your salary must be "reasonable" for the work you do for your company. Low balling the salary (and the related payroll taxes) can come back to bite you.
The S-Corp election comes with a number of restrictions on the ownership of the S-Corp including:
- The max # of owners is capped at 100
- The owners must be individuals (and some trusts). Another LLC or corporation can not be an owner.
- You can only have one class of stock
- Profits must be distributed based on the ownership % of each owner. You can't have different distribution rules as you could with an LLC
The above information is just a summary of the S-Corp election and it's not for everyone.
However, "if the shoe fits" for your LLC situation, there may be significant taxes to be saved.
Please get in touch with us if you would like to explore the S-Corp election further.
Caldwell, Walley & Caldwell, LLP
In our Bend, Oregon office:
In our Salem, Oregon office,
Steve or Dwayne Caldwell