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Tax Saving Tip: Should You Convert Your LLC or Partnership to an S-Corp?

Hi. My name’s Greg Reed and I’m the head of tax here at SmartBooks. Today I want to talk to you about potentially converting from an LLC or a Partnership to an S-Corp. Now, this isn’t for everyone, but if it makes sense for you, it could be a significant tax savings opportunity.

Self-Employment Tax Impact on LLC and Partnerships

The reason being is that LLCs and Partnerships, when they pass through the income to your personal return, 100% of that income is subject to what we call self-employment tax. This is a 15.3% tax in addition to your regular income tax on your personal tax return.

S-Corp Pass-Through Income Not Subject to Self-Employment Tax

Now, S-Corps on the other hand, still pass through the income but that pass through is not subject to the self-employment tax. The catch is that you still need to pay yourself as an S-Corp owner a reasonable salary. We’d be happy to help you determine what a reasonable salary is for you and your business as well as talk you through the different factors that are involved with that.

By paying yourself a reasonable salary and then taking what are classified as owner distributions from the business, neither your salary nor your distributions are subject to the self-employment tax, thereby saving you an extra 15.3% on your taxes.

Income Threshold Recommendation for Converting to an S-Corp

So, if that’s something that you might want to consider, there is a certain income threshold that we would probably do this at. It’s around $40,000 to $50,000 per year. If your business is netting $40,000 or $50,000 and you’re an LLC or a Partnership, you may want to consider converting to an S-Corp.

If you’d like some advice on whether this type of conversion makes sense in your situation, contact us. We’d be happy to help.