How LLCs and Corporations Can Lower Self Employment Taxes

How LLCs and Corporations Can Lower Self Employment Taxes

How LLCs and Corporations Can Lower Self Employment Taxes

Self-employment can be an attractive prospect, especially for those of us who value freedom and self-direction in the workplace. But many don’t realize that a shadow looms over freelancers and independent consultants everywhere: the dreaded self-employment tax. Even new business owners can be hit with these taxes if they are in a general partnership, an LLC taxed as a disregarded entity, or run their own sole proprietorship. However, there is hope: in some cases, forming a corporation or limited liability company (LLC) can help relieve some of the cost.

Self Employment Tax

The self-employment tax is really a combination of your Social Security and Medicare taxes. You probably already know that when working as an employee for someone else, half of these taxes are paid for by the employer while the remainder is deducted from your paycheck. The self-employed must pay these in full, and the full cost can be a major shock. Social Security, however, comes with an income cap. The specific cap changes annually.

LLC and Corporate Taxation

The IRS automatically taxes corporations as C Corporations. They pay corporate income tax on the company’s earnings. Its owners, known as shareholders, will need to pay personal income tax on their take-home earnings as well. The other status available to corporations is the “S Corporation,” which means that instead of paying a corporate income tax, the shareholders report the company’s income using their own tax returns. The automatic taxation status of an LLC is identical to that of a sole proprietorship or general partnership depending on the number of owners, or they can elect to be taxed as a C Corporation or, as discussed below, an S Corporation. Learn more about the possible benefits here.

Using S-Corporation Status to Reduce Self-Employment Taxation

Unlike sole proprietorships, general partnerships, or LLCs that are taxed as such, an S Corporation only needs to pay Social Security and Medicare taxes on the salary that the owner(s) pays to themselves instead of the business’s total profits. This is a lower amount in almost all situations. However, the IRS requires that this salary be a reasonable one. If you try and avoid the self-employment tax by lowballing your salary, then you’ll get in trouble fast. Consider reaching out to a trusted tax professional for guidance

Electing to be taxed as an S-Corporation

First, you’ll need to form your LLC or corporation by filing with the Florida Division of Corporations, either by mail or online. Then, you will file form 2553 with the IRS if you’re a corporation or form 8832 if you’re an LLC. Self-employment taxes can be a pain. Don’t make them anymore painful than they need to be.

Looking to start a business or grow your current business? As a firm of entrepreneurs ourselves, we know what it takes to start a business off right. Contact FL Patel Law today by visiting our website or calling (727) 279-5037.

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FL Patel Law PLLC is a boutique business law firm dedicated to entrepreneurs and companies.

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