As a self-employed individual, you probably have concerns about how to file self-employment taxes. What is self-employment tax? What do you need to know about self-employment tax reduction? Can you get better tax benefits if your company is an LLC or S corp? Your own business can get confusing fast, especially when tax season rolls around!
Correctly filing your taxes as a business owner can make or break your financial year and even affect your entire business! That’s why we’ve laid out some basics to help you through tax season and beyond as you run your company.
What is an S corporation?
An S corporation elects to be taxed under Subchapter S of the Internal Revenue Code. Essentially, it’s a corporation whose shareholders have chosen to report corporate income, deductions, losses and other financial facts on their personal tax returns. If your business qualifies as an S corp, you can avoid double taxation by having your tax assessed at your individual income tax rate.
Your business will need to meet certain requirements to qualify as an S corporation:
- Be formed as a US corporation.
- Cannot be a domestic international sales corporation, certain financial institutions, insurance company, or other ineligible types of corporations.
- Can have no more than 100 allowable shareholders such as individuals, estates, or certain trusts (not partnerships, for example).
- Have only one class of stock and no more.
- All shareholders must be US citizens.
To become an S corp, you’ll need to complete certain tasks like having all your shareholders sign Form 2553, Election by a Small Business Corporation, and submit this to the IRS. You’ll also need to make sure you have formed the structure properly. A lawyer who is proficient in small businesses can help you ensure that this is done correctly.
How are S corps taxed?
S corporations are taxed as pass-through entities. A pass-through entity is’nt subject to corporate income tax but is taxed under the individual income tax rates of the shareholders or members. This means that your S corporation doesn’t pay federal income tax but flows business income through to the shareholders or members. Even if the money stays in the business, each business owner must pay tax on their share of income from the S corp. Shareholders and members must file an information tax return called Form 1120S to the IRS, stating each member’s share.
How should I form my business: LLC or S corp?
LLCs and S corporations share some similarities, so it can be confusing to decide how you should form your business. These are some big differences that can help you easily differentiate between the two types of business entities:
S corporation
- S corps can have up to 100 owners or shareholders, but no more.
- S corps must have US citizens or residents as shareholders.
- S corps cannot be owned by other corporations, LLCs, most types of trusts, or partnerships.
- S corps must avoid giving shareholders preference to distributions over other shareholders. Therefore, they are not allowed to issue stock with different financial rights.
- S corps can own LLCs.
- S corps can have boards of directors who elect officers to manage business affairs.
- S corps must observe extensive internal formalities, such as bylaws, annual shareholder and director meetings, meeting minutes, and thorough corporate records.
- S corps allocate profits and losses based on the percentage of ownership each shareholder has within the business.
LLC
- LLCs can have an unlimited number of members.
- LLCs can have non-U.S. citizens as members.
- LLCs can have subsidiaries without restriction.
- LLCs can issue various classes of stock with different financial rights.
- LLCs are generally not able to own S corporations.
- LLC owners can choose certain members to function as managers over the LLC. This means that members who are not appointed managers will not be involved in daily business decisions.
- LLCs can allocate profits and losses on any basis they prefer, as opposed to allocating them according to the percentage of ownership each member has.
Self-employment tax reduction
What is self-employment tax?
Self-employment taxes help fund Medicare and Social Security only. It’s different from income tax which are taxes based on the money you earned. Self-employment taxes are separate from the income tax and you may be required to pay both. You must file an income tax return if your net earnings from self-employment are $400 or more. If it was less after calculating losses, you don’t have to pay income tax.
How can LegalShield make tax season simpler?
When you’re running a business, tax season can pop up before you know it and potentially wreak havoc on your finances if you’re not prepared. Consider starting with a LegalShield Small Business Legal Plan. Our plans provide access to a provider law firm in your state to assist your business with a wide variety of business legal matters for a low monthly subscription cost.
- Documents reviewed, phone calls, and letters: Get documents reviewed up to 15 pages, ask your provider law firm to make phone calls and write collection letters on your behalf.
- Income Tax Audit Services: With a LegalShield membership, in case of an IRS audit, you receive a set number of hours for advice, consultation, negotiations, and representation.
- Advice and Consultation from a law firm: Access advice and consultation on business legal matters, including tax advice, by calling your provider law firm. Simplify the process of understanding deductions and credits for your state taxes!
We offer three plans, so you can select the right plan for your business and only pay for the benefits you need most.
Do you need help answering any difficult legal questions about your business? LegalShield’s Small Business Plan connects you to a trusted lawyer to schedule a tax consultation before taxes are due.
Check out the end-of-year checklist small businesses should follow to prepare for the following year.
Pre-Paid Legal Services, Inc. (“PPLSI”) provides access to legal services offered by a network of provider law firms to PPLSI members through membership-based participation. Neither PPLSI nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or advice. The information made available in this blog is meant to provide general information. It is not intended to provide legal advice, render an opinion, or provide a recommendation as to a specific matter. The blog post is not a substitute for competent legal counsel from a licensed professional lawyer in the state or province where your legal issues exist, and you should seek legal counsel for your specific legal matter. Information contained in the blog may be provided by authors who could be a third-party paid contributor. All information by authors is accepted in good faith, however, PPLSI makes no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of such information.
