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Howard Tax Prep often works with Chicago residents that have to pay self-employment taxes. Although we are a nationwide tax firm, because our office is located in the South Loop of Chicago, we attract more Chicago tax preparation clients.
If you are a sole proprietor, a 1 member LLC, or a general partner in a business, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry. For example, let’s assume you operate a sole proprietorship and you earn $100,000 of net income. You must report your income on Schedule C of your tax return, which creates a self-employment tax liability of $14,129.55, in addition to your personal income tax! In order to lower self-employment taxes some self-employed Chicago residents have our firm apply their business for the IRS Subchapter S taxation status.
What Is an S Corporation?
The Subchapter S Corporation is a special IRS election that has to be requested during a very narrow 75-day window of time that begins on the day the business owner forms the corporation or LLC. Many of our self-employed Chicago tax clients choose to keep their legal entity as a corporation or a LLC, but have their taxable entity become an S corporation.
For federal tax purposes, your S corporation is a pass-through entity, meaning that the corporation’s income, deductions, and tax credit items are passed through to you, the shareholder, on a Schedule K-1. For some business owners, this is the best of both worlds: liability protection with personal taxation.
To elect S corporation status, the LLC or corporation must be: To qualify for S corporation status, the corporation must meet the following requirements:
· Be a domestic corporation
· Have only allowable shareholders
· May be individuals, certain trusts, and estates and
· May not be partnerships, corporations or non-resident alien shareholders
· Have no more than 100 shareholders
· Have only one class of stock
· Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Is it a good fit for your business?
No matter how they make look the same, every tax situation is different. S Corporations are great for businesses that:
· Provide services (insurance agents, consultants, etc.);
· Do not have large start-up costs;
· Won’t be making any major equipment purchases before operations begin;
· Generate lots of revenue with minimal effort and expense.
S Corps are typically not recommended for holding real estate due to debt basis issues, transferring of real estate, and unfriendly tax treatment upon death.
If you want to know how much you can save on taxes by lowering your self-employment taxes, call our office today at 708-529-6604 or Toll Free at 855-743-5765. Howard Tax Prep can provide you with tax reduction strategies for your business taxes, in addition to your personal tax return.
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