Now is a great, if not extraordinary, time to start (or to continue operating) a small business, or to shift from W-2 (employee) status to 1099 (independent contractor) status. The new small business tax breaks in effect beginning 1/1/18 are almost unbelievable.
Even doctors, accountants, attorneys and other “professionals”, (who typically pay more tax than other small business owners), with married household NET income at or below $315,000, will qualify for ALL of the most lucrative new tax breaks ($157,500 for single filers). And ALL small business owners, regardless of net income thresholds or “professional” status, will enjoy the new top pass-through tax bracket of 25% on all business income.
Although higher earners will continue to be subject to Alternative Minimum Tax (AMT), AMT income thresholds are significantly higher under the new law, therefore, for most, AMT should generate much less of a tax burden than in prior years.
For a small business owner to truly take advantage of current tax law, he or she should consider filing taxes as an S-Corp. Georgia companies (as in most states) registered as an LLC, PC, or other corporate structure, can maintain their existing corporate status and, at any time, elect to file taxes as an S-Corp. Unless you have serious legal tax problems, the S-Corp election is almost always allowed by the IRS.
Filing as an S-Corp can significantly reduce self-employment tax (SE tax). SE tax is (essentially) social security and Medicare tax paid by a small business owner when filing his or her 1040 (annual income taxes). When a small business owner prepares his or her personal income taxes, SE is calculated automatically on 100% of business net income, and is nearly impossible to avoid. However, S-Corp owners DO NOT pay SE tax; instead, S-Corp’s typically pay a significantly reduced social security and Medicare tax. One caveat to filing taxes as an S-Corp: since S-Corp operating and accounting/tax prep expenses are significantly higher than for non-S-Corps, Doorstep Mobile Tax suggests that all of our clients delay S-Corp tax status until net business income (income after expenses) is anticipated to be $17,000 – $20,000, or higher for the current year. Note that higher income = greater S-Corp tax savings; therefore, when net business income exceeds $20K – $30K, not filing taxes as an S-Corp could be very costly.
Caution: Be aware that many other factors, such as your industry (what your company does), and owner’s profession, are extremely important factors that must be considered when determining the optimum time to file taxes as an S-Corp. You can, however, request S-Corp status at any time after your business has started, so no worries for existing business owners who wish to take advantage when the time is right.
Unfortunately, the IRS rarely allows retro-S-Corp status to cover prior periods, with the exception of an approximate 5 month lookback (see example below):
Example: In May 2018 you determine that you want to qualify all business income earned since 1/1/18 as S-Corp income. S-Corp status requests filed in May 2018 or earlier are almost always retro-approved to 1/1/18 (unless you request a later S-Corp start date). Although there is no “true” S-Corp election cutoff date, S-Corp status requests filed in June 2018 or after would risk being assigned a much later S-Corp start date (sometime after 1/1/18). In such a case you’d pay SE tax on all income earned prior to your S-Corp start date (a 2018 start date that the IRS would randomly assign), and file a separate S-Corp tax return for business income earned after the assigned S-Corp start date.
Regardless of the caveats, startup expenses and learning curve (i.e. headaches), electing optimal S-Corp status, combined with the tax new laws, is a home run for almost all small business owners!