Sales Tax Fundamentals
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How an S-Election Provides Tax Savings for eCommerce Business Owners
byNovember 1, 2020
Most eCommerce business owners generally like to keep an ear low to the ground when it comes to tips about how to save on income taxes. After all, who doesn’t like to save money?
One of the most underutilized approaches for saving on income taxes? Filing for an S-Election. Here’s a look at the benefits this election can provide you and your eCommerce business no matter what entity you’ve incorporated as.
An LLC can make an S-election
Good news if your eCommerce business is already incorporated as an LLC: you can make an S-election! Technically speaking though, S Corporations actually do commonly begin as C Corporations or LLCs, which makes them a C Corp with an S Corp election. When you have an S-election, you are able to be taxed as a partnership which helps avoid double taxation and is known as a “pass-through” entity since profits pass through the company level.
Increasingly, and interestingly enough, there has been an increase of LLCs with an S-election due to this tax benefit. Taxes aside though, an LLC is also fairly inexpensive and easy to maintain. It helps to keep your personal and professional assets separated, reduces risk of an audit, and allows for management flexibility by its members.
Put yourself on payroll
It’s a good certainty that many eCommerce business owners don’t think about putting themselves on payroll because they are “too small.” However, tax savings can be relevant at any business size! By putting yourself on payroll as an S Corp, you’ll be able to save on FICA taxes.
The one rule of thumb to keep in mind? Now that you’re on the payroll, the IRS requires that you pay yourself a reasonable salary. In order to determine how to set said salary, consider your responsibilities, training, experience, and commitment to the business. And if you’re still a little concerned you might overshoot the numbers, QuickBooks also advises meeting with a CPA along with thinking about the makeup of business revenue to determine your salary amount.
Ready to file an S-election?
Great! The IRS requires all businesses interested to file Form 2553 Election by a Small Business Corporation. Keep in mind that there are also requirements that need to be met outside of simply filling out this form. Qualification requirements include maintaining one class of stock, being filed a U.S. corporation, and having less than 100 shareholders, all of which must have a U.S. social security number and must be individuals, estates, or certain qualified trusts. After you’ve met the requirements, then you can go ahead and file for an S-election.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.