- Hi everyone.
I'm attorney Aiden Durham with 180 Law Co. in Colorado.
Happy new year, and welcome back to All Up In Yo' Business.
(gentle music) (keyboard clattering)
In this episode of all up in your business,
I'm gonna tell you guys the one thing
that you can do right now
that can save you and your business thousands of dollars
in taxes in 2021 and beyond.
Before we dive into it, I would really appreciate it
if you would click that little thumbs up button
to like this video, subscribe to my channel,
if you haven't already, and share this video
with everybody you now.
And be sure to check the description for links
to additional information and resources.
And while you're there,
check out my channel memberships as well.
I'm gonna be posting a very special, members only
how-to video as a followup to this video.
That one's only gonna be available
for my channel members,
so sign up now so you don't miss it.
All right, so what is the one thing that you can do
to save your business money on taxes this year?
The answer is S corporation.
All right, that's all for this episode.
Thanks for watching, bye.
Just kidding, but no, seriously, electing
to have your business tax
as an S corporation can dramatically reduce
your overall tax bill as a business owner.
Let me explain.
There are four different types
of tax classifications that commonly apply to businesses.
They are sole proprietorship, partnership, S corporation,
and C corporation.
If you operate a business as a sole proprietorship
or as a single-member LLC,
you will by default be taxed as a sole proprietor.
If you operate as a partnership or multiple-member LLC,
by default, you'll be taxed as a partnership.
In those instances, the IRS basically treats it
as that the LLC doesn't exist.
The business's income is treated as personal income
to the individual business owner or owners,
and business owners have to pay self-employment taxes
on their income.
Since we're not employees,
we don't have payroll taxes withheld from our paychecks,
so the IRS instead they take their cut
in the form of self-employment tax, which is about 15%.
So if the business's income is,
let's say, $100,000, for example,
that means the business owner
will be paying approximately $15,000
just in self-employment taxes alone.
And remember, we also have to pay ordinary income tax
on that income as well.
So all of that income will be subject
to self-employment taxes and ordinary income tax,
but many businesses have the option of changing that
by electing instead to be taxed as an S corporation.
It's important to keep in mind
that this doesn't change the actual structure
of your business entity.
You can have an LLC that's taxed as an S corporation.
It's still legally recognized an LLC,
it just tax as S corp.
You're not actually converting or changing your LLC
into a corporation.
When you elect to be taxed as an S corp,
you become an employee of your business
in addition to being the owner.
You pay yourself a salary as an employee,
and only that salary will be subject
to those additional self-employment taxes.
The remainder will only be subject to ordinary income tax.
So again, if the business's income is $100,000,
let's say the business owner takes a salary of $50,000.
That 15% self-employment tax only applies to the salary.
So it would be 7,500 in self-employment taxes
as opposed to 15,000 in that first example.
So now you may hear that and think to yourself,
well, why wouldn't every business just be taxed
as an S corp?
Obviously, it can save you quite a bit of money,
so why wouldn't everybody do this?
Well, first off, only business entities can be taxed
as S corporations, meaning that you're not eligible for it
if you operate your business as a sole proprietorship
or a general partnership.
Sole proprietorships and partnerships
aren't legally recognized business entities.
From the legal perspective,
the individual owners are the business.
So if you're considering making an S corp election
to save on taxes, you first need to form an LLC
or a corporation for your business
if you haven't already done so.
You do this by filing Articles of Organization
or Incorporation with the secretary of state's office.
Once you form the company, you'll want to apply for an EIN
or employer identification number
through the IRS at irs.gov.
And you'll also wanna prepare
or better yet have a lawyer prepare the operating agreement
or bylaws for the company.
Then once the LLC or corporation is all set up, you can make
that S corp filing election.
Check the description because I have a handy tool available
on my website that allows you to quickly
and easily form an LLC online in any state.
The IRS also has some rules when it comes
to being taxed as an S corporation.
For example, S corps can't have more than 100 shareholders.
They can't have more than one class of stock
and the shareholders all have to be residents
or citizens of the United States.
So not every business is eligible for the S corp election.
There are also some deadlines for when you can elect
to be taxed as an S Corp.
When you first start a business, you have 2 1/2 months
to make the S corp election for it to be effective
for that tax year moving forward.
If you don't make the initial election at that point,
then you have 2 1/2 months from the beginning of each year
to make the election for it to be effective
from that year forward.
If you wanna take advantage
of the potential tax savings of the S corp for 2021,
the election must be made by March 15th, 2021.
So let's say you started a business last year
in 2020 as a single-member LLC
and you did not make that S corp election initially,
that means you'll be taxed as a sole proprietor
when you file your 2020 tax returns
and you have until March 15th to make the election
for it to be effective for all of 2021.
Let's say you've been operating your business
as a sole proprietorship
and now you wanna be taxed as an S Corp,
like I said earlier, you first need to form an LLC
or a corporation with the secretary of state.
Then you'll have 2 1/2 months from that date,
whatever date your LLC or corporation was officially formed
to make the S corp election effective as of that date,
otherwise you can file the election later,
it won't be effective until the following tax year.
You only need to make the tax election once,
you don't have to do it every year.
If you elect to be taxed as an S corp in 2021
that will continue into 2022 and beyond
until or unless you change the tax classification,
that's something else.
You can make the S corp election
by filing Form 2553 with the IRS.
As I mentioned in the beginning of this video,
I'm gonna do a follow-up members only video
where I will explain exactly how to complete the form
and specifically what must be on the form
for the IRS to accept your tax election.
So make sure you're a channel member
if you want more info on how to elect to be taxed
as an S corporation.
While the S corp election can potentially save you a lot
of money in taxes, it's not always going to be beneficial
for every business owner.
The tax filings are a bit more complicated with an S corp
and because of that, I always recommend
that you work closely with a CPA or a tax advisor.
So you kind of need to assess that the tax savings
will be worth the additional costs involved.
If you're gonna save 1,000 bucks in taxes,
but you're paying your CPA 2,000 as a result,
then maybe the S corp election doesn't make sense
for you right now.
So it's always best to speak with an attorney
or a tax professional before making any changes
to your business to make sure it's the right move for you.
That's all for this episode folks.
Drop a comment below, let me know what you think.
And don't forget to check the description
for links to additional information
and resources, including my online tool for forming an LLC
in any state.
And check out my channel membership,
so you don't miss the exclusive members only video
where I will walk you through the process
of how to actually complete and submit the form
to the IRS to elect to be taxed as an S Corp.
Thank you all so much for watching.
I'm Aiden Durham, and I'll see you next time.
(gentle music)