w-2 -> llc -> S-Corp VOILÀ

Remember my client who left his 9 to 5 IT engineer job and started his own photography business a few years ago? Because of his desire to make his dream come true, he made the decision to switch from making stable yet stagnant W-2 income as an employee to making business income as an ambitious entrepreneur. As an old saying goes, “Luck is what happens when preparation meets opportunity”. I would say, the chance of “tax savings is what arrives when actions match ambition” is much higher and more realistic. Sound too good to be true? Let the numbers do the talking.

Let me cut the chase. Let’s assume that he makes the same amount of money throughout his transformation process. On his journey from being a W-2 employee, to being a sole member of an LLC, and finally to being a single owner of an S-Corp, his effective income tax rate dropped from 22.34% to 17.96% and eventually to 11.23%. The reduction of the effective income tax rate between W-2 income and LLC income derives from two reasons including deduction of business-related expenses and an increase is the contribution limit from employer sponsored 401(k) to self-employer’s solo 401(k). The further reduction of the effective income tax rate between LLC income and S-Corp income is mostly due to the fact that his self-employment income changed from the entire amount of business net income earned from LLC to a much lower amount of reasonable compensation that I helped him decide that he would make as the sole owner of his S-Corp. Eventually, he secured a total tax savings of $18,253 when he was making money through his single member LLC. But he accomplished much bigger tax savings in the amount of $51,742 when he runs his business in an S-Corp.

How did he achieve this? First, he has a good basic understanding of how having his own business can help him save taxes to begin with. Second, he has the luck and wisdom to identify a good tax adviser who goes above and beyond to help him save taxes. Because of my tax expertise, I helped him file an S-election to convert his SMLLC to an S-Corp and decide the amount of reasonable compensation that is good to his financial situation. Furthermore, I leveraged my tax/financial planning knowledge to help him open up a solo 401(k) account. It helped him reduce his current taxable income thus current tax payable through tax deferral strategy.

Remember, the magic is triggered by you, the audacious and ambitious entrepreneur, who make the decision to change your own way of money-making and pick me as your tax advisor and financial planner. In the meantime, me, as the tax magician, feel tremendously fulfilled and happy when I see my knowledge and guidance save you time, money, and potential headaches when dealing with their tax obligations. What a win-win!