| Hi friends,
You may remember that I talked a bit recently about how I became an S Corp in 2023. For years, I’d operated my business as a sole proprietorship, then a single member LLC. (You can always pop into my group program, SUSTAIN, for a lesson on this.) I moved 25% of my income into a high-yield savings account each month, for taxes. And I hired an accountant to help me file taxes at the end of the year.
But in 2023, I realized that there was more to learn about taxes. After chatting with other solopreneur friends, I decided that it might make sense to transition to S Corp status, to save a bit more money on taxes.
In short, an S Corp is a tax classification that tells the IRS how to tax your business, specifically that portions of your income should be taxed differently. (This is how you save money.) It’s a type of LLC. When you’re an S-Corp, you become designated as both an employer and an employee, so you get to take the deductions of being an employer and enjoy the benefits of being an employee.
Now, each month, I pay myself a salary. This equates to about 60% of my income, and it’s taxed normally, via my payroll service. I then take a distribution for the other 40% of my income. This part isn’t taxed as highly, which is how I save money! (Depending upon where you live, you can take up to 60% as a distribution, which can save you even more.)
In 2023, I saved an extra $6,000 just by becoming an S Corp. Overall, I think it was worth it – and I want to share some pros and cons with you, if you’ve been thinking about changing your filing status.
Pros for becoming an S Corp:
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Obviously, saving money is great. We love an extra $6,000! I used it to create more financial padding in my business; now, I feel far less stressed about getting a big tax bill.
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Becoming an S Corp also forced me to get really clear on how much I wanted to pay myself each month. My business expenses became very obviously divided from my personal expenses, even more than they were when my business was a simple LLC, which was nice from an organizational perspective.
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While we’ve always deducted our family’s health insurance premiums as business expenses (which we pay for out of pocket), we can save even more as an S Corp.
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I didn’t use this perk, but I was eligible to apply for additional credit lines and/ or loans as an S Corp.
Cons for becoming an S Corp:
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You’ll want someone to help you change your tax status. (Today’s newsletter sponsor, Lettuce, has a great way to support you with this. When you sign up for their services before 2025, they will help you make the transition and you won’t need to pay a thing. Learn more here and use the code JENNI500 to get an extra $500 in your business bank account.)
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Running payroll feels a bit complicated. I was glad to be using a service like Gusto because I’m not sure how I would have managed the tax deductions myself. If you sign up for Lettuce, they help with this piece by running payroll for you, meaning you don’t need a second payroll provider!)
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Becoming an S Corp may not save you a lot of money if you’re under the $70,000 annual revenue mark. The more you earn, the more you’ll save with this designation. But the extra work and management only becomes worthwhile once you’re earning at or above that six figure mark!
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You’ll need an accountant to support you in figuring out your quarterly tax bills and how much to set aside each month. Again, Lettuce builds this into their program by setting aside what you owe each time you get paid, automating all of your required tax payments and taking care of your state and federal tax forms.(They literally fixed all the problems with becoming an S Corp with this service! It’s amazing. Essentially, it feels exactly the same as filing taxes when you’re an S Corp.)
Despite the learning curve, becoming an S Corp has forced me to level up in a way that feels beneficial overall. Once I hit this status, I hired a bookkeeper and a more present CPA, and I created some detailed spreadsheets to help me track payroll and spending. And it saved me money, which I can now use to feel a sense of extra safety and ease.
If this sounds appealing to you, I’d suggest you schedule a call with Lettuce to chat about how they can support you. Their current promotion allows you to sign up now to get your S Corp set up for January 1, and pay nothing until 2025. And with the code JENNI500, they’ll also give you $500 back, into the business account they’ll set up for you. Basically, Lettuce pays for itself.
Respond to this email with any questions you have.
Cheers,
Jenni
PS. As always, it’s important to remember that I’m not a CPA or financial specialist. I’m just a fellow business owner and coach who specializes in financial systems! |
