Tax savings are an important factor to consider when deciding whether to incorporate your company as an S-Corporation or a Limited Liability Company (LLC). Taxes can quickly add up, and when they do, you want to reap the rewards of savings rather than watch money go down the drain.
Choosing the right structure could save your business hundreds of dollars, as personal rate levels are typically lower than corporate tax rates. S-Corporations and LLCs offer similar tax benefits, but regardless, it is critical to figure out which combination would be most advantageous for your business. Doing so will help you maximize savings.
The Breakdown: S-Corporation Taxes
The personal rates enjoyed by S-Corporations are certainly attractive – unless your company has taxable income of 75,000 or less. In this case, owners actually get a lower corporate tax rate, potentially making a classic corporate structure a better option.
Since shareholders who work for S-Corporations receive fair compensation, they are subject to standard employment taxes. Working owners can choose whether they want to receive their net profit earnings as cash distributions added to their other personal income or as additional compensation subject to extra payroll taxes. S-Corporation owners who are solely investors, on the other hand, are taxed personally on their share of net profit.
The Breakdown: LLC Taxes
Single-owner LLCs are taxed in the same manner as sole proprietorships, whereas those with multiple owners are taxed like partnerships. If you need to keep a significant amount of your cash profit in the company in the interest of business, you can designate that your LLC get taxed as a corporation.
Working owners in an LLC are required to pay self-employment taxes on an annual basis because the Internal Revenue Service (IRS) considers LLC members self-employed business owners. The IRS does not withhold federal and state, Social Security, or Medicare taxes from these companies, and LLCs are not responsible to pay them at the end of the year.
Deciding between the S-Corporation and LLC structure for your company is a complex decision that should be made carefully and based on your individual business situation. However, you can simplify the filing process by working with GovDocFiling. Start the filing process today.