Creating a Limited Liability Company (LLC) and electing to be taxed as an S Corporation is one of the most famous ways to reduce your tax liability by thousands of dollars.
This is because distributions to shareholders of the business are not subject to Social Security and Medicare tax (FICA of %15.3).
This is possible for any business (whether you have established an entity or not) and any type of agent/independent contractor that receives form 1099 every year. This is how it works.
You still get to pay yourself like before the election. The trick here is that you now pay yourself as an employee.
Say your business made $100,000. You could pay yourself a salary of $70,000 as an employee and the remaining $30,000 as a distribution. You only get to pay FICA taxes on the $70,000. Not on the $100,000 like you have been before electing the S Corp treatment!
%15.3 of $30,000 is $4,590 in tax savings.
Numbers do speak. What’s even better is the fact that it is six times less likely for the IRS to audit your business if you have made an S Corp election. This is what we do. We help you implement strategies so that your tax savings number speaks while at the same time reducing your likelihood of an audit. The argument of paying fewer tax dollars increases the risk of audit is a myth.