You can convert your limited liability company to an S corporation.

The problem with reporting your business activity on your personal return is that your profits are subject to both federal income taxes and SELF-EMPLOYMENT taxes. If you like the idea of paying into a big government fund that you might get back someday at retirement, then read no further. If you want to save thousands of dollars a year, then pay attention!

S corporations are formed by savvy small business owners for earned income activities. This is done to avoid self-employment tax. An S corporation is a pass-through entity, which means there is no federal income tax, and the owners report the net income on their personal return. Self-employment tax is not applicable to this type of income. If you make more than $50k in your business, that will save you a lot of tax. The IRS expects you to take a reasonable salary from your S corp, which is subject to payroll taxes, in order to eliminate all of your self-employment tax liability. You don’t have to take all of your profit as salary. If you take half of your profit as salary and half as a distribution from the S corp, your taxes will be slashed by thousands of dollars each year.

Real estate investors…

If you are a landlord, you don’t have to worry because rental income is not considered earned income and thus not subject to self-employment tax. You would report this income on your tax return as a disregarded limited liability company. If you flip or wholesale properties, the IRS could tag you as a dealer, which makes your real estate activity a business, not an investment. You would have to pay self-employment tax on your earnings. Imagine three years of flipping activity, during which you earn $100,000 in net profit, reporting the activity as short-term capital gains, not subject to self-employment tax. You will be hit with self-employment tax, plus interest and penalties if the IRS audits you and moves your income to schedule C. OUCH! You may consider an S corporation for short-term deals.

Short-term rentals such as VRBO and AIR BNB are considered serviced rentals and thus will be treated as earned income, not rental income.

It is easier than you think.

You don’t need to start over if you want the benefits of an S corporation. If you have an existing limited liability company, you can convert it to an S corporation for tax purposes. You can keep your existing name and bank account, but be treated for federal income purposes as an S corporation if you keep your existing EIN number. The conversion requires a few IRS forms, an updated operating agreement, and a new setup of your accounting records. I have created the first of its kind, so you don’t need an attorney or CPA to do it. The conversion kit is for the S Corporation.

Here is what you get with the kit.

The kit comes complete with the following: