A sole proprietor pays roughly 30% in taxes on net earnings because self-employment tax hits the full amount. Electing S-corp status through IRS Form 2553 lets you pay self-employment tax only on your W-2 salary, not all profits, cutting your tax bill significantly.
What is the best entity to use for saving on taxes? So you have an LLC, there's a partnership, you have an S corp, you have a C corp. Those are all different entities. We have done videos in the past, so feel free to check it out on the LLC itself and some of the complications that come with it, because an LLC can be taxed like many of the other entities. It just depends on the situation. I can't tell you based on your specific situation what the best entity is for tax savings. I for sure can tell you the worst situation is being a sole proprietor. This is where you operate under your Social Security. You pay income tax on the net income, and then you pay self-employment tax or 15.3% on top of the income tax. Someone who makes $30,000 who's in a low tax bracket can still find themselves paying 30% tax just because they have a really bad tax structure. While I can't tell you the best because it's super important that you consult with a CPA specifically about all the factors in your hemisphere of how you make income, many clients who have a service-based company where they're providing a service or they're selling products, the S corporation is something that you're probably going to want to consider. Most of our clients have an S corp in their structure somewhere. The reason is, is because yes, you pay income tax on the net income just like a sole proprietor, but you don't pay self-employment tax on the net income. Now because of that, the IRS says, well, if you work in your business as the owner, as an S corp owner, we're going to make you pay a wage. Okay, that's fine. So you gotta issue yourself a W-2. That W-2 you're going to pay payroll tax on, and because you're the owner, the Payroll tax is the same thing as self-employment tax. But the tax savings is coming because you don't pay the payroll tax on all of your net income. You just pay it on the W-2 portion, which will be less than your net income. Therefore, the S corp, if you have service-based type of income or selling products, the S corp is a better tax structure for sure. As I mentioned, sole proprietor being the worst. Consult with someone. Just having an LLC of itself doesn't guarantee you're going to save a ton in taxes. You want to make sure that you're getting the right advice, that you're structuring the LLC the right way so that you're filing it the right way. So that we're minimizing taxes the right way. And with the S corporation, whatever business entity you did set up, you have to tell the IRS that you want your business to be taxed like an S corp. You do that by filing Form 2553, and that tells the IRS, hey, treat me like an S corp. So there you go. What is the best entity for tax savings? It depends. S corp is really great for many people, but again, it's really important that you get advice about your specific situation. Feel free to reach out to us. Let us look at everything. We can help you determine if the right entity needs to be changed. Let's, The lowest hanging fruit for most people. Why overpay in taxes when you could simply just change the entity? But if you don't know, you don't know. So reach out to us, let us help you. Please don't forget to like, subscribe, and remember, the IRS does not like you. They're not your friend. We are.
