S Corporations & Tax Savings: A Houston Business Owner's Guide

Are you a Houston entrepreneur concerned about your tax burden? If you’re operating as a sole proprietor or single-member LLC owner, S Corporation conversion might be a potential strategy for reducing your taxes legally.

What is an S Corporation, and How Can it Save You Money?

An S Corporation is a special tax designation that allows businesses to pass their income, losses, deductions, and credits through to their shareholders for federal tax purposes. This structure avoids double taxation typical of C corporations.

The key advantage involves self-employment tax reduction. As a sole proprietor or single-member LLC, your net income is subject to self-employment tax, including Social Security and Medicare taxes. With an S Corporation, only your salary is subject to self-employment tax. The remaining profit can be distributed as dividends, generally taxed at a lower rate.

Illustrative Example

Using a $100,000 net profit scenario:

Scenario 1: Single-Member LLC

• Self-employment tax applied to entire $100,000
• Income tax assessed at applicable bracket
• Total SE tax: approximately $14,130

Scenario 2: S Corporation

• Owner salary: $60,000 (subject to self-employment and income taxes)
• Remaining $40,000 distributed as dividends (taxed at typically lower dividend rate)
• SE tax: approximately $8,478
• Potential Savings: approximately $5,652

The Role of Proper Bookkeeping

Accurate and meticulous bookkeeping is paramount for S Corporations. The IRS requires that owners pay themselves a “reasonable” salary. Insufficient salary could trigger reclassification of distributions as wages, resulting in additional self-employment tax obligations.

Organized financial records enable easier income, expense, and distribution tracking, simplifying tax preparation and minimizing error risk.

How EZQ Group Can Help Houston Businesses

S Corporation Conversion: We handle the paperwork and required filings for business conversion.

Tax Planning: We develop strategies to maximize savings while maintaining compliance.

Bookkeeping Services: We maintain accurate, current financial records.

Ready to explore if S-Corp election is right for your Houston business? Contact EZQ Group for a free consultation.