The S Corp election is definitely a trending topic when it comes to tax savings strategies, and it's earned it's spot up there. Business owners save thousands just by filling out a small form saying they want their profits to be immune from self-employment tax. The benefits are great, but this choice does come at a cost.
In order to be compliant and take advantage of S Corp taxation, you need to check a few boxes first. The S Corp isn't for everyone and requires you to file a whole separate business tax return. The benefits do often outweigh the costs, though.
Here are three signs you’re ready:
(1) Your profit - The S election starts getting you some real finance savings once you have over ~$30K in profit.
(2) Your books - If you are inconsistent or messy with your books, having an S Corp will just make it more complicated. You want to make sure you are keeping personal and business separated and have a bookkeeping system.
(3) Payroll - One of the requirements to take advantage of the S election is to run payroll for owner’s compensation. The owner-employee must pay themselves a reasonable salary before taking any distributions. You will need to enroll in a payroll service, file quarterly returns and sign up for worker’s compensation, even if it is just you.
If you think you meet these, chat with your accountant to see if this is a good option for you. Share this with a fellow business owner!