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Is Now the Right Time to Switch from an LLC to an S-Corporation?


As your business begins to grow, you need to meticulously plan for growth and added tax savings. One way many small businesses enjoy additional tax savings is switching from an LLC to an S-Corporation, providing your business with self-employment and retirement tax savings opportunities.

Self-Employment Tax Sayings

The first advantage of switching from an LLC to an S-Corporation is the ability to save on self-employment taxes. Many small business owners who operate a Single-Member LLC are subject to self-employment taxes when income is reported on the individual tax return, resulting in an additional 15.3% of tax. Although half of this assessed amount is able to be taken as an offsetting credit, you will still be paying in significantly more compared to an S-Corporation setup. S-Corporations are able to deduct the entire portion of salaries and wages paid as a business expense while the income passed through is not subject to self-employment taxes, minimizing your burden.

Retirement Savings

Another consideration of switching from an LLC to an S-Corporation is the ability to contribute to retirement accounts. Single-Member LLCs are generally only allowed to contribute $5,500 to a Roth IRA while S-Corporations allow owners to set up a Solo 401k. Solo 401ks give owners the ability to contribute up to $18,000, resulting in more savings when they retire. Keep in mind that you can’t contribute more than your salary. Nevertheless, many LLC owners are able to contribute a significant amount more when they switch to an S-Corporation.

Summary

Switching from an LLC to an S-Corporation comes with tax savings on self-employment income and retirement contributions; however, S-Corporations are subject to expanded regulations from taxation authorities and come with more maintenance expenses. Whatever method you choose, it is important to retain a qualified accountant to walk you through the accounting and tax implications, which is where Abdul Tax Consulting and Accounting Services can help. Reach out today for more information.

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