Is your entity structure costing your Beauty Business money?
😕 Sadly, most of you are NOT using the right business entity structure!
That means that your current business entity structure is likely COSTING you money!
Wrong Business Entity Structure = Overpaying in taxes!
Right now...TODAY, look at your entity structure and evaluate whether it is costing you money.
Schedule C and Partnership Filers ➡️ Are you paying too much Self-Employment Tax?
S Corporation Filers ➡️Is the income from your business being taxed at your very high individual tax rate (vs. the very low C Corporation tax rate of 21%)?
C Corporation Filers ➡️ Is the income you are taking from the business being double taxed (once at the corporate level and again at the individual level) as dividend income?
Consider one of the following "entity switch" strategies (depending on your current business entity type) to save money on your taxes:
Sole Proprietors & Single-Member LLC
Consider switching to another entity type such as the S-Corporation. You could realize some major tax savings.
For example, If you have $50,000 of net income and you have a salary based off of 40% of net income or $20,000:
If you stayed a single-member LLC, your self-employment tax would be $4,239.
If you made an S-Corporation election, your payroll tax would be $1,836.
This is a tax savings of $2,403!
General Partnership & Multi-Member LLC
Limited Members (Limited Partners) of Partnerships do not have to pay self-employment tax on their business income.
If you live in a non-community property state, consider bringing the spouse on as a "non-working" limited partner to receive income not subject to SE tax.
Also, non-working "investor" partners are not subject to SE tax.
You should start considering this move when your business starts to make net income (revenue minus expenses) at around $30,000.
You can use the S-Corporation election as a strategy to save at least 8-10% of your net income not only in the current year but as far back as 3.5 years!
If you're netting at least $30,000, you could save $2,400 - $3,000.
Once you are an S-Corporation, be sure to set a Reasonable Compensation that takes into account ALL the tasks you do, even the "lower-level" tasks like laundry and sweeping floors.
When you include in your salary your "low" level tasks, your salary will "legally" lower and that will result in more money that is not subject to self-employment/payroll tax.
Also, be sure to implement an "Accountable Plan" and procedure into your beauty business. This will allow you to get reimbursed for expenses incurred by the owner-employee that does not have to be reported as income by the owner-employee AND you are able to take a tax deduction on the S-Corporation tax return.
An accountable plan is an employee reimbursement allowance arrangement or a method for reimbursing employees for business expenses that complies with IRS regulations.
If your business gets to a point where you are not seeking to take money out of the business, you may want to consider switching to a C Corporation to enjoy having a flat 21% tax rate (at least until 2025 unless Congress changes this)!
But there are other ways to enjoy the C Corporation’s 21% flat tax rate AND pull its profits out of the business while dodging double taxation.
One way to dodge the C Corporation double taxation is to use “advances or loans” instead of dividends.
By taking a loan, you can avoid the tax on dividends.
If you would like to discuss how to take advantage of these please book your call here: ColemanTax Discovery Call.
Happy Tax Saving!!!
❤️ Kenesha "The Beauty CPA" Coleman