What is the easiest way for self-employed individuals to save on taxes?

Greetings! I'm Brock Delaney, CPA, and I'm back to give you a refresher on an important topic. I have not written in the blog in a while, but not much has changed recently when it comes to saving on income taxes for self-employed individuals. The answer to the question, "What is the easiest way for self-employed individuals to save on taxes?": S-corp election.

Why? Self-employed individuals, whether they create a sole-prop LLC or a partnership are going to be subject to the self-employment tax (SE tax). What is the SE tax? In short, it's payroll tax, and the IRS needs to collect it to fund social security and medicare. The total tax rate for payroll tax is 15.3%, and assuming your business is profitable, you as owner/partner will have to pay SE tax on full net profit. If you have not filed a tax return as a self-employed individual yet, you will understand this when you do: the SE tax is huge.

I meet clients all the time who make less than $150,000 per year and their income tax bill is well into five figures. That's when they come to me for help, and that's what I'm here for! I'm even willing to give away the secret here for free on the blog. Electing to turn your small business into an S-corp is the easiest way to save money on tax. Are there other things you can do? Yes, of course, but the easiest thing to do is contact me or another professional about making the S-corp election.

How does the S-corp save money on the SE tax? The S-corp is also a flow-through entity like a LLC or partnership, but income from an S-corp to the owners is not subject to self-employment tax. There are two important caveats to S-corp election to remember. First, S-corp owners must be added to payroll as employees. You might be asking, "But I'm a business owner, not an employee." Yes, but once you make the S-corp election you are now a shareholder-employee. Think of it like wearing two hats. You have an employee hat after making the S-corp election, and you wear it at the same time as your shareholder hat. Secondly, S-corps must file a tax return (similar to a partnership). This would be an added cost for you if converting from a sole prop LLC to an S-corp, but trust me it will be worth it. The tax savings will far outweigh the added cost of filing form 1120S (S-corp tax return).

My word of warning to all the readers out there: make sure you hire a competent professional to make the election for you. There have been many times when clients come to me, and their prior accountant did not properly guide them in S-corp regulations. For example, you have to start payroll for yourself as the owner of the S-corp to qualify for the election. You must pay yourself a "reasonable salary" as a shareholder-employee. Myself and other qualified professionals out there will guide you through the payroll setup process. It's easy to do, and it's cheap! Online payroll providers are now as low as $59 per month for full-service.

You might be asking the question: "What if the deadline for making the S-corp election has already past? Is it too late to save on tax?" NO, there are late election procedures that allow for you to apply to election to the beginning of the year and possibly earlier. However, applying for late election relief requires a professional with knowledge about the process to do it correctly (to avoid rejection).

If you have made it this far, thank you for reading! You definitely have much to think about when it comes to running a business. I'm here to help! Please call me for a free consultation.