I run a small landscaping business with two employees. My accountant told me I should consider an S corp instead of my current LLC. He said it could save on self-employment tax but I'm not sure I understand the tradeoffs. Anyone here made that switch? What should I be thinking about?
Entity Choice
My accountant suggested looking beyond a standard LLC
S corp election is not a separate entity, it's a tax election. You'd still have an LLC but taxed taxed as an S corp. Main thing is you have to pay yourself a reasonable salary and only distributions above that avoid SE tax.
How much net profit are we talking? Below a certain threshold the payroll costs and admin hassle can eat the savings. My accountant told me not to bother until I was consistently clearing six figures.
Last year was around 95k net before my own pay. This year looking similar or a bit more. Payroll for myself would be new, I currently just take draws.
The reasonable salary requirement is the paert people get wrong. You can't pay yourself 20k and take 70k in distributions. IRS watches that and reclassifies if it's too aggressive.
Also worth checking your state. Some states tax S corps differently or have franchise taxes. I'm in California and the 1.5% S corp tax plus the annual minimum caught me off guard the first year.
following this. i'm in a similar spot with a small painting crew. my cpa mentioned it too but i haven't pulled the trigger.
At 95k net, after a reasonable salary of say 55-60k, the remaining 35-40k avoids the 15.3% SE tax on the employee side and the employer side you'd be paying anyway as payroll tax. So the savings are real but not enormous. Maybe 5-6k a year depending on details. Weigh that against payroll service costs, extra tax prep fees, and the compliance headaches. For some people it's worth it, for others not.
That math helps, thanks. My accountant quoted an extra $800 a year for the S corp return and said payroll would run about $600 annually through a service. So maybe net 4k savings. Still seems worth it but I want to make sure I'm not missing something.
Don't forget about the QBI deduction. S corp vs sole prop can affect how that works out. My tax guy said it was a wash for me but it's not always obvious.
One other thing, you mentioned two employees. Are they on payroll already? If so you've already got the infrastructure. If not, adding yourself to payroll is a bigger lift.
Something else to consider, S corps have stricter rules on who can be a shareholder, and how many. Probably not an issue for you now but if you ever want to bring in a partner or investor it limits your options.
Honestly at that profit level I'd probably do it. The savings are modest but consistent. Just make sure your accountant is the one who handles the reasonable salary calc and documents it. Don't wing that part yourself.
Appreciate all the input. My employees are already on payroll through a service so that part is handled. I think I'll ask my accountant to walk me through the reasonable salary piece and the state implications before I commit. Thanks.