FFN #54: The best-kept secret for saving on your taxes 👀

👩🏼‍🏫 Class is in session

When deciding between an LLC (Limited Liability Company) and an S Corp (S Corporation), it’s important to understand the key differences. Again, why they don’t teach us this in school is beyond me. Both LLCs and S Corps offer liability protection, meaning your personal assets are generally shielded from business debts and lawsuits. The reason why most people go with an LLC structure is it’s easier to set up and manage. With fewer formalities and more flexibility in how you operate your business. It’s a popular choice for freelancers because it allows for straightforward taxation—profits and losses pass through to your personal tax return, where you pay income tax and self-employment tax on your earnings. Reviewing your biz structure is a powerful way to keep more of what you earn, but pairing it with top-notch accounting software is key. That’s where the experts at Collective come in. On average, they help their members save $10K a year on taxes! But they don’t just stop at savings—Collective provides you with a dedicated team that handles your accounting, payroll, invoicing, expenses, compliance, and more. If you’re curious and would like to save more on your taxes or just change your biz structure so you can save more of what you earn, Collective has given our FF’s their first month free - use code ‘FREELANCINGFEMALES’ at checkout.

Disclaimer: If you’re a freelancer making $60K in profit per year or an S Corp owner with no W2s employees for the first six months you’re eligible for Collectives services. #partner

💸 Let’s talk savings

Easier doesn’t always equal better though freelancers so let’s look at how you could save. An S Corp is a tax designation that can be applied to either an LLC or a corporation, providing specific tax advantages. Although S Corps require more compliance (don’t worry Collective can help you with this), including setting up payroll and filing additional tax forms, they offer the potential for significant tax savings. In an S Corp, the business owner can pay themselves a reasonable salary, with the remaining profits distributed as dividends. Unlike an LLC, where all income is subject to self-employment tax, only the salary portion in an S Corp is subject to these taxes. The dividends are taxed at a lower rate, potentially reducing your overall tax burden.

😮‍💨 Wait! I’m still confused

It’s okay I was as well, but let me explain. This tax structure can be particularly beneficial because by designating your business as an S Corp, you can minimize the amount of income subject to self-employment taxes, leading to $$ savings. For example, in a typical LLC, all business income is treated as self-employment income, which is subject to a 15.3% self-employment tax rate, covering Social Security and Medicare. However, when you elect to be taxed as an S Corp, you can pay yourself a reasonable salary and classify the remaining profits as distributions or dividends. While your salary is still subject to self-employment taxes, the dividends are not, meaning you could save $$! Let’s get technical for a second. If your freelance business earns $100,000 in profit, and you pay yourself a salary of $60,000, the remaining $40,000 could be taken as a dividend. Only the $60,000 salary would be subject to self-employment taxes, saving you approximately $6,120 in taxes on the $40,000 distribution that would have otherwise been taxed under an LLC structure.

To find out the list of other ways your business could save with an S Corp structure head to our blog here or if you’re ready to speak to the experts chat to Collective today.

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