One of the most expensive tax decisions a small business owner makes is the one they made at the beginning and then never revisited. Business entity structure directly determines how your business income is taxed. The entity type you chose when you filed your LLC may have made sense at $40,000 a year. At $150,000, the same structure could be costing you $10,000 or more in self-employment tax that you do not legally owe.
The Default LLC Problem
A single-member LLC with no special election is treated as a disregarded entity for federal tax purposes. Every dollar of net profit is subject to both income tax and self-employment tax at 15.3%. This is appropriate at lower income levels. As income grows, the self-employment tax burden becomes significant enough to warrant a different structure.
When the S-Corp Election Changes the Math
When an LLC elects S-corp tax treatment, the business income is split between a reasonable salary, which is subject to payroll taxes, and distributions, which are not subject to self-employment tax. At the right income level, the payroll tax savings on distributions more than offset the cost of running payroll. The conversation typically becomes relevant around $60,000 to $80,000 in net profit, and becomes clearly beneficial above $100,000.
This Is Not a One-Time Decision
Tax law changes. Your income changes. Your business structure should be reviewed regularly, not set once and forgotten. At 360 Global Business LLC, we evaluate entity structure as part of every business tax engagement. The question is not which entity sounds best. It is which structure produces the lowest legal tax liability given your specific situation this year.
Find out if your structure is still working for you. Book a Business Tax Strategy Session
Shannon C. Williams | CEO, 360 Global Business LLC | 27 Years Federal Tax Educator and Consultant | SDVOSB · WOSB · MBE | U.S. Air Force Veteran | 1-855-500-1514 | taxes@360globalbusiness.com