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How To Save Money On Your Taxes As a Small Business Owner

Behind the screen

Disclosure — In order to grow this small business, By Sofia Brown earns revenue in a few different ways. I sometimes earn an affiliate commission on the sales of products I link to in blog posts. I will only share items I genuinely love and want my readers to know about! These links are arranged between the retailer and By Sofia Brown (you, my dear reader, will never pay more for products)! This allows me to continually run my blog at Lifestyled By Sofia and engage with this beautiful community. Thank you for reading!

I'm Sofia!

Hi friend,

Small Business

BEAUTY

TRAVEL

LIFESTYLE

Time is a hot commodity these days, so I am beyond excited that you chose to spend some of yours with me. Discover popular posts on beauty, lifestyle, travel, and small business tips below.

Tax season always throws me for a loop, y’all. I am NOT the numbers person in the relationship, yet somehow I got stuck with filing our tax return every year. 💩

Being a business owner, though, it’s sort of self-inflicted. Let’s be honest, my husband has no clue what my business receipts and expenses are for. If he saw some random Sephora bill for $650, there would be lots of questions and long conversations that we just really, really don’t need to get into. 

So, needless to say, the bulk of our joint tax filing falls on me.

Thankfully, the upcoming tax season will be wildly different.

I really never thought I would be this excited to talk about numbers and tax filing structure, but this is where we’re at, people. One year of straight-up highway robbery on your tax return will do that to you. 

You become legitimately obsessed with finding ways to save money on your taxes, to the point where you’re awake at 2 AM googling everything there is to know about S-Corps.

And this time, the 2 AM Googling paid off (or it will on April 15, 2025 🙃)

After 4 years of filing as a single-member LLC, I am officially switching my tax filing structure to S-Corp for the 2024 tax year.

If you know absolutely nothing about business filing structure, keep reading. I’m about to break it down for you and give you some of the best tips for saving money on your small business tax return as an S-corporation!

How Switching to an S-Corp Can Save Money During Tax Season

LLC vs. Sole Proprietorship vs. Partnership vs. S-Corp

Before we plunge into the nitty-gritty of S-Corp tax filing, let’s lay out some of the most common small business tax structures: the Sole Proprietorship, Partnerships, LLCs, and the star of our show, the S-Corp. There are some pros and cons associated with each when it comes to tax filing. Check out the table below for a snapshot:

Tax Filing StructureProsCons
Sole Proprietorship1. Simple setup and administration1. No liability protection for personal assets
2. Pass-through taxation (income taxed at individual rates)2. Subject to self-employment tax on all profits
3. Full control over business decisions and operations3. Limited ability to raise capital
4. Minimal regulatory requirements
Partnerships1. Pass-through taxation (income and losses allocated to partners)1. Joint and several liability for partners’ actions
2. Flexibility in profit distribution and ownership structure2. Potential for disputes among partners
3. Combined resources and expertise of multiple partners3. Complex partnership agreements and governance structures
4. Potential for tax deductions for qualified business expenses4. Subject to self-employment tax on partnership income
LLC (Limited Liability Company)1. Limited liability protection for members’ personal assets1. Subject to self-employment tax on all profits
2. Pass-through taxation (option to be taxed as a partnership)2. Potential for member disputes and management challenges
3. Flexible ownership structure and management options3. Requires formal operating agreement to establish governance
4. Less regulatory requirements compared to corporations
S-Corporation1. Potential for tax savings through salary/dividend split1. More complex setup and maintenance compared to sole proprietorship or partnership
2. Limited liability protection for shareholders’ personal assets2. Strict IRS compliance and reporting requirements
3. Avoidance of self-employment tax on profits beyond reasonable salary (this is a big one!)3. Restriction on number and type of shareholders
4. Potential for retirement savings through employee benefits4. Requirements for formal corporate structure and governance

Each tax filing structure has its own set of advantages and disadvantages, so it’s important for small business owners to carefully consider their specific needs, goals, and circumstances before choosing the best structure for their business. Please make sure to consult with a tax professional or legal advisor for guidance in making this decision!

Ya girl is just trying to make alllll this less confusing for the girlies who would literally rather skydive with a sinus infection than dive into these gory tax details.

The Tax-Saving Magic of S-Corps

It’s important to note that S-Corp is simply a tax filing status. It is NOT a business structure. Meaning—a business that was originally incorporated as an LLC (like mine is!) can file their taxes under S-Corp status but still maintain the same structure. So your categorization as an LLC wouldn’t change.

Now that we’ve got our tax-filing characters straight, let’s take a closer look at the S-Corp. How exactly does it work its magic? By blending the benefits of limited liability protection with the tax advantages of pass-through taxation, the S-Corp offers a winning combination that can significantly reduce your tax burden.

Is Your Business Eligible for S-Corp Status?

Okay so I know we’re both HYPE about the tax-saving potential of S-Corps, but before telling the IRS where they can stick it, it’s essential to make sure your business meets the eligibility criteria first. Here’s what you need to know:

  1. Domestic Business: Your business must be a domestic corporation (incorporated in the United States) to qualify for S-Corp status. Foreign corporations are not eligible.
  2. Limited Number of Shareholders: S-Corps are restricted to a maximum of 100 shareholders. This limitation helps maintain the closely held nature of S-Corporations.
  3. Eligible Shareholders: S-Corps cannot have nonresident alien shareholders or certain types of trusts and entities as shareholders. Additionally, shareholders must be individuals, estates, certain types of trusts, or tax-exempt organizations.
  4. Single Class of Stock: S-Corporations can have only one class of stock. This means all shareholders must have the same rights to distributions and liquidation proceeds.
  5. Business Structure: Your business must be structured as a corporation (either formed as one or converted into one) to elect S-Corp status. Sole proprietorships, partnerships, and LLCs taxed as partnerships do not qualify.
  6. Business Income: There is no minimum income criteria, but most people recommend that your business make at least $60,000 in income before switching over to S-Corp filing. Especially if you’re outsourcing your taxes (which we’ll talk about in a minute!), you’ll want to make enough to see tax savings even after paying your tax accountant or bookkeeper.

If your business meets these criteria, congratulations! You may be eligible to reap the tax-saving benefits of S-corporation status. However, it’s always a good idea to consult with a tax professional or financial advisor to ensure that transitioning to an S-Corp is the right move for your specific situation.

Navigating the Tax Filing Maze as an S-Corp

So, your business officially qualifies and now you’re sold on the idea of becoming an S-Corp. But what’s involved in actually filing your taxes under this structure? Well, buckle up, because it’s a bit more involved than filing as a Sole Proprietorship or single-member LLC.

First things first, as an S-Corp, you’ll need to file Form 1120S, the U.S. Income Tax Return for an S-Corporation, by March 15th of each year. This form reports your business’s income, deductions, and credits. But wait, there’s more! You’ll also need to provide each shareholder with a Schedule K-1, which outlines their share of the corporation’s income, deductions, and credits.

But here’s where things get interesting: as an S-Corp, you’re required to pay yourself a reasonable salary, which is subject to employment taxes. This means you’ll need to set up a payroll system to ensure you’re withholding and remitting the appropriate taxes to the IRS throughout the year.

And let’s not forget about quarterly estimated tax payments. As an S-Corp shareholder, you’ll likely need to make quarterly estimated tax payments to cover your share of the corporation’s income tax liability. These payments are due on April 15th, June 15th, September 15th, and January 15th of the following year.

Phew! That’s a lot to keep track of, but with a little organization and planning, you can navigate the S-Corp tax filing maze like a pro.

Behind the screen

Disclosure — In order to grow this small business, By Sofia Brown earns revenue in a few different ways. I sometimes earn an affiliate commission on the sales of products I link to in blog posts. I will only share items I genuinely love and want my readers to know about! These links are arranged between the retailer and By Sofia Brown (you, my dear reader, will never pay more for products)! This allows me to continually run my blog at Lifestyled By Sofia and engage with this beautiful community. Thank you for reading!

I'm Sofia!

Hi friend,

Small Business

BEAUTY

TRAVEL

LIFESTYLE

Time is a hot commodity these days, so I am beyond excited that you chose to spend some of yours with me. Discover popular posts on beauty, lifestyle, travel, and small business tips below.