The S Corp election is the super tool that can both reduce tax liabilities and audit risk at the same time.
Successful sole proprietorships and LLC’s can face higher tax rates due to being subject to both the ordinary income tax and the self-employment tax. They also have a high audit risk with the IRS and that will likely increase as agents are hired and trained.
If your net income is at least $25000, you should be considering a conversion of your sole proprietorship or LLC taxed as a sole proprietorship) to an S Corporation. We typically see tax savings of $1000 or more for every $20,000 in net income after a conversion. Look at your prior year tax returns and see how much of your federal taxes are from the self-employment tax. In many cases, this tax is greater than your federal income tax! Conversion to an S Corporation will change that.
You can check the tax yourself. On the 2021 1040, ordinary income tax is on line 16 while the self-employment tax is on line 23 and is calculated on the Schedule SE. You can actually have no taxable income and still pay self-employment tax.
The IRS is also going after Schedule C businesses (both sole props and LLC’s) in greater numbers and the service is hiring an additional 80,000 more personnel in the coming years. If you think those additional personnel are to improve service, you’re sadly mistaken. 4% of the 80 billion dollars targeted for the IRS in the Inflation Reduction Act (IRA) are for taxpayer services (maybe so they can answer their phones, sorry for the snark). But 57% is budgeted for enforcement (audits). Treasury Secretary Yellen has stated that audit rates for those making under $400,000 won’t increase but that is not reflected in the actual text of the code. The Congressional Budget Office estimates that an additional $20 billion will be collected over the next 10 years from those making less than $400,000.
AFS can help you set up your S corporation in a turnkey process that is trouble free to you. We might even be able to convert prior years and save you even more money by amending those returns.
We will provide a free review of your business to show you the exact benefits you can realize from this change.
Give us a call soon to set up your free consultation.
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