What Exactly is an S Corp? We’ve Got the Answer

Plus, How it Could Save You $$$

Before we dive in, let’s clear something up. When thinking about your business, you don’t have to choose between an LLC and S Corp. You can (and probably should) have both! You can organize your business as an LLC and designate it as an S-corp for tax purposes. Let us (Lettuce!) explain:

An LLC…

1. Is a legal business status governed by state law
2. Gives you the legal protections you want for your business, like separating your business assets and liabilities from your personal ones

An S Corp…

1. Is a tax classification governed by the federal government (IRS)
2. Tells the IRS how to tax your business, specifically that certain portions of your income should be taxed differently (and saving you money)
3. Identifies you as both the employer and the employee, so you get to take the deductions of the employer and enjoy the benefits of being an employee

So, with your business organized as an LLC, but with S Corp tax status, you gain access to some tax-saving benefits only corporations enjoy…

Top 6 Perks of an S Corp

1. Pay yourself a salary (Reduces your taxable income!)
2. Pay for your and your family’s health insurance premiums through the
   business (deduct them as the employer, enjoy them as the employee!)
3. Make both Owner and Employee contributions to a Solo 401(k) plan (You can write them off as a business expense!)
4. Purchase assets–equipment, vehicles, etc–for business use (Another tax write-off as they depreciate!)
5. Separate your personal and business finances and accounting (Reduces your self-employment taxes!)
6. Apply for credit and loans as a business (Separates business and personal debt!)
   
   

LLC vs. S Corp

It’s not a competition! Now you know you can have one, or both. You can enjoy all the legal protections that come with an LLC. But at a certain income level (usually $100k or more), you’ll be missing out on some significant tax advantages without the S Corp. And why would you want to do that?

S Corps are all about the tax advantages. You’re able to leverage the benefits of a full corporation (listed above), normally unavailable Sole Proprietorships. We should also highlight that one of those benefits, #5, reduces the 15.3% self-employment tax sole proprietors pay on their full income. With an S Corp, you’re allowed to divide your income into two parts, Salary and Owner’s Distribution–and you only pay self-employment taxes on the Salary portion.

Confused?!

Just remember, in an S Corp you’re two people: the salary-earning employee and the distribution-receiving employer. It’s a bit wonky, we know, but it’s precisely this setup that can save you thousands in taxes every single year. Cha-ching! (It had to be said.)

Choosing an S Corp can dramatically reduce what you pay out of pocket for taxes. An S Corp splits your revenue into two buckets, one called your salary, and another called the owner's distribution. You only pay the Social Security and Medicare taxes on one bucket.

Keep more of the money you make! If you’re a business making $100k or more, you should enjoy the tax advantages that come with S Corp status. Until you’re able to:  put yourself on payroll, pay for (and deduct) the cost of your health benefits and, ideally, contribute to a 401(k), you simply won’t be fully leveraging your business to reduce your taxable income and keep more of your hard-earned money where it belongs:  in your pocket.

Next Steps

So now that you know what an S Corp is, what’s next? We suggest you find out how much an S Corp could potentially save you. Find out fast, free and with zero obligation using our ingenious (if we do say so, ourselves).

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