Best Tax Structure for Side Business to Maximize Tax Savings?

The timing of your entity change is definitely important for tax savings. Here's what you should consider: If you switch to an LLC taxed as an S Corporation, you can pay yourselves reasonable salaries (subject to employment taxes) and take the rest as distributions (not subject to self-employment tax). This could save you about 15.3% on a portion of your income. However, the entire profit still passes through to your personal returns. An LLC taxed as a C Corporation would allow you to keep some money in the business at the corporate tax rate (21% federal), which might be lower than your personal rate. But beware of double taxation when you eventually take money out as dividends. The best structure depends on your long-term plans. If you're reinvesting half the profits back into the business anyway, a C Corp might make sense. But if you need regular access to the cash, an S Corp could be better. Either way, you should make this change BEFORE receiving the payment to maximize your tax savings.

After dealing with a similar situation in my consulting business, I found this amazing tool called taxr.ai that really helped me navigate the entity selection process. I was totally confused about whether to go S-Corp or C-Corp and the tax implications of each. I uploaded our financial projections and partnership docs to https://taxr.ai and it analyzed everything and showed me the actual tax differences between staying as a partnership versus converting to different entity types. The analysis even factored in the timing of the conversion relative to our expected income! It saved me from making a costly mistake - I was about to go C-Corp but realized S-Corp was much better for my specific situation. Might be worth checking out before making your decision.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here, and it was seriously helpful for our situation. The analysis showed that an S-Corp would save us about $12k in taxes compared to our partnership for our expected income this year. The report broke down exactly how much we'd save in self-employment taxes and gave us guidelines for reasonable compensation based on our industry. It even included a timeline showing when we needed to file each form to make the election effective before our big payment. We're heading to our accountant tomorrow with the report, but it's given us a much clearer picture of our options. Definitely worth the time!

If you're struggling to reach the IRS about your entity change (which can be crucial for timing your big payment), I've had amazing success using Claimyr to get through to an actual person at the IRS. After spending DAYS trying to reach someone about our business tax ID, I found https://claimyr.com and watched their demo video (https://youtu.be/_kiP6q8DX5c). They basically hold your place in the IRS phone queue and call you back when an agent is available. I was skeptical but I managed to talk to an actual IRS agent within like 2 hours instead of the entire day I wasted before. Got all my entity questions answered and made sure our elections were properly processed. Total game changer when you're racing against the clock on tax stuff.

I have to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it myself since I needed to talk to the IRS about our S-Corp election that seemed to have disappeared into the void. Had been trying for literally WEEKS to get through on my own. Used Claimyr yesterday and got a call back in about 90 minutes. The agent I spoke with was able to confirm they received our election forms and gave me the exact date we were officially changed to an S-Corp. Timing was critical for us too because we had a big contract payment coming in. Having that confirmation directly from the IRS gave us the confidence to proceed with our tax planning. Totally worth it just for the peace of mind.

One thing nobody's mentioned yet - if you're planning to grow significantly, the C Corp structure might have long-term advantages. I switched from S-Corp to C-Corp last year because: 1) We wanted to reinvest most profits into scaling the business 2) The flat 21% corporate rate was lower than my personal tax bracket 3) We're planning to seek outside investors eventually 4) We could provide better benefits (health insurance, etc.) The key is whether you plan to keep most money in the business. If you're regularly pulling out profits, you'll face that double taxation issue with C-Corps (corporate tax + dividend tax). Also worth noting: the timing of your entity change might trigger a "short year" for tax purposes, requiring multiple tax returns for the same calendar year. Can get complicated!

Quick tip: Don't forget about QBI (Qualified Business Income) deduction! If you stay as a partnership or go S-Corp, you might qualify for up to 20% deduction on your pass-through income. This is HUGE and can make pass-through entities more attractive than C-Corps in many cases. C-Corps don't get this deduction. At $120k in profits (split between two people), you'd likely qualify for the full QBI deduction without running into the income limitations or service business restrictions.