If You Make $100K+ in Revenue and File with a 1099, You’re Taking a Loss!
If your business is generating over $100,000 in revenue and you’re filing taxes as a sole proprietor with a 1099, you’re likely leaving significant money on the table. The solution? Structuring your business strategically—specifically by understanding the difference between an LLC and an S-Corp. Let’s break it down!
LLC vs. S-Corp: What’s the Difference?
LLC (Limited Liability Company): An LLC is a flexible business structure that protects your personal assets from business liabilities. It’s easy to set up and doesn’t require a complex tax structure. However, all profits from an LLC are subject to self-employment taxes (Social Security and Medicare), which can add up when you’re making $100,000 or more.
S-Corp (S Corporation): An S-Corp is not a type of business entity but a tax classification. By electing S-Corp status, you can save significantly on self-employment taxes. Unlike an LLC, an S-Corp allows you to split income into:
A reasonable salary (subject to payroll taxes).
Dividends or distributions (not subject to payroll taxes).
Why Filing as an S-Corp Makes Sense for $100K+ Revenue
When your business earns over $100,000, you’re paying hefty self-employment taxes if you’re filing as an LLC or 1099 sole proprietor. Here’s how an S-Corp can save you money:
Lower Self-Employment Taxes:
As an LLC, you pay self-employment taxes (15.3%) on the entire $100,000.
As an S-Corp, you only pay these taxes on your salary, not your dividends.
Example: If you pay yourself a $50,000 salary and take the remaining $50,000 as dividends, you only pay payroll taxes on the salary portion, saving thousands.
Reasonable Salary Rule:
The IRS requires you to take a “reasonable salary” for the work you perform. This prevents you from avoiding payroll taxes entirely while allowing you to save on the dividend portion.
Pass-Through Taxation:
Like an LLC, an S-Corp is a pass-through entity, meaning you avoid double taxation. Business income passes through to your personal tax return.
Health Insurance and Retirement Savings:
As an S-Corp owner, you can deduct health insurance premiums and contribute to retirement accounts, further reducing your taxable income.
Key Benefits of an S-Corp:
Tax Savings: Save thousands annually on self-employment taxes.
Limited Liability: Like an LLC, an S-Corp protects your personal assets.
Professional Image: Operating as an S-Corp enhances credibility with clients and vendors.
Flexibility: Combine a reasonable salary with distributions for maximum tax efficiency.
How to Transition to an S-Corp
Form an LLC: Start by forming an LLC in your state if you haven’t already.
Elect S-Corp Status: File Form 2553 with the IRS to elect S-Corp taxation (usually within 75 days of forming your LLC or by March 15 for the current tax year).
Set Up Payroll: Establish a payroll system to pay yourself a reasonable salary.
Track Finances: Keep accurate records to justify your salary and distributions.
Take Control of Your Taxes Today
If your business earns $100K or more in revenue, filing as an LLC or sole proprietor could be costing you thousands in unnecessary taxes. Switching to an S-Corp might be the game-changer you need.
