As an “S corporation,” you gain some of the benefits of a corporation while remaining self-employed.
An “S-Corporation” is a filing designation with the IRS that “elects” to file your LLC as a “sort of” corporation; this means that you can still function as an LLC (which is a pass-through entity, more on that in a bit) but also gain some of the benefits of a corporation.
If you filed federal Form 2553 with the Internal Revenue Service (IRS) to elect to become an S corporation, you do not need to file a similar form with Minnesota. Minnesota automatically accepts your S corporation status once approved by the IRS.
Detailed video on cities and states that tax S-Corps:
Does your state or city tax S-Corps? If so, does it still make sense?
4. Why Passive Income, Such As Buy and Hold Rental Real Estate, Should Not Be Taxed As an S-Corp:
Detailed video on how passive income is taxed:
Why rental property income should not be in an S-Corp
We all have to pay personal income tax. However, as an LLC, you will pay an additional 15.3% self-employment tax on top of that for any net income that you have for the business.
Once you turn into an S-Corp, and become a payroll employee of your own business, some of your self-employment taxes just dissolve. Simply by shifting half of your self-employment tax liability to the business as an expense, instead of treating it as an income, you get a lower tax rate.
You also won’t have to pay the big quarterly tax payments, since as an S-Corporation, most, if not all of your tax liability, is held every month through your monthly and even quarterly tax withholdings.
By running your health insurance and retirement benefits through your S-Corporation company payroll, for yourself, you knock down your net income considerably, and at the same time, create more tax savings, through the form of deferred compensation and 401k.
3. You Protect Yourself:
As an S-Corporation, this division between your personal finances and business activity gets set in stone. Being an S-Corp is a signal to the state and federal agencies that your business is a fully-fledged entity that should be treated as different from other personal financial activity, further protecting you from audits, legal judgments, and other things that might occur.
4. You Earn Credibility:
A corporation is a more trusted source for commercial activity these days than an individual. By becoming an S-Corp that is registered and licensed by state and federal authorities, you are communicating you are a serious business with real services to offer.
5. You Are Less Likely to Get Audited:
As an S-Corp, you are 4000% less likely to get audited by state or federal agencies than a Schedule C. Such a reduced risk simply by filling 2553 form and properly managing your S-Corp financials.
