Frequently Asked Questions
How does incorporation decrease self-employment tax?
Incorporation can significantly decrease self-employment tax, which is a key advantage of converting a business from an LLC to a corporation. When a business is formed as an LLC, the owners are treated as self-employed individuals. This means they are required to pay Medicare and Social Security taxes on all the business's profits. However, when an LLC is converted to a corporation, the taxation structure changes. Corporations are taxed differently than LLCs. They are taxed on the amount of profit made, and shareholders are required to pay personal income tax on their dividends. This is known as double taxation. However, corporations can also choose to be taxed as S corps, where the entire profit is passed to the shareholder’s personal taxes, avoiding double taxation. This can result in significant tax savings. Moreover, an LLC can opt to be taxed like a corporation, which can also lead to tax savings. They can also choose to pay taxes as sole proprietorships and partnerships, where the money made and lost goes straight to personal income taxes.
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