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Are you paying too much Self-Employment Tax?

Taxation & Business Specialist | Melbourne, Florida

Are you paying too much Self-Employment Tax?

Being a Sole Proprietor

As a sole proprietor, you must pay self-employment taxes on your net business earnings at a current rate of 15.3%: 12.4% is for social security and 2.9% for Medicare.

In 2021 the first $142,800 of your earnings is subject to Social security taxation, and all your net earnings are subject to Medicare tax. If you make more than $200,000 ($250,000 for married couples filing jointly), you will pay an additional 0.9% in Medicare taxes. Even if you already started receiving Social Security or Medicare, you still need to pay self-employment taxes.

If you are a sole proprietor or an independent contractor with net profits at or exceeding $10,000, you should consider converting your company into an S Corporations, and here is why:

S Corporation Tax Classification

When you choose the S Corporation tax classification, your net business income is no longer subject to self-employment taxes. S Corporations file a separate business tax return (Form 1120S) and although each shareholder reports a Schedule K-1 (their allocation of the business profits or loss) and pays income tax based on their personal tax bracket, the profits are only subject to income taxes. Say goodbye to paying self employment taxes on all your business income!

Instead, as an employee of the S Corporation, you’ll set yourself up to be fairly and reasonably compensated through payroll and control how much of your wage is subject to employment taxes. The S Corporation then splits Social Security and Medicare taxes with its employees, meaning the S Corporation withholding rate is 7.65% in total on payroll wages, while the employee pays the other 7.65% out of their wages. Additionally, payroll is an expense for the business and will lower the S Corporation’s taxable income.

As the shareholder of the S Corporation, you’ll also be entitled to receive draw-distributions, which are never subject to payroll taxes and usually not capital gains tax, assuming your distributions do not exceed your shareholder basis. Yes, there is the burden of corporate administration and tracking your shareholder basis, but once you witness the tax savings, you’ll wish you’d done this sooner. We guarantee the cost of incorporating will be an investment that will increase your retained earnings and tax savings by amounts in excess of both initial outlay and annual administrative requirements.

In addition to the tax benefit, registering as an S corporation will help establish credibility with your vendors, customers, and investors.

You should choose a business structure that gives you the right balance and benefits: how much will you pay in taxes versus how much do you take home? Each state has specific requirements and procedures for new businesses wishing to incorporate so be sure to check your state rules.

To check if incorporating your small business will save you tax dollars, and to learn more, contact our office for assistance.

by Maria Climan – Content Creator at Half Full Marketing

Work with our Small Business Specialists

Running your own business isn’t easy, and it certainly takes time, determination, and lots of hard work, however with the right tools and knowledge, it can be a lot easier. Alron Corps, Inc., a subsidiary of Alron Enterprises, Inc. specializes in providing small businesses the highest quality expert assistance. Contact us today to get started! We look forwarding to working with you.

Give us a call: 321-951-7626 or send us an email: jenni@alroncorps.com.


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