Looking to cut down on self-employment taxes on your partnership income? Converting your partnership into an S corporation might be the answer. If you currently run your business as a partnership or an LLC taxed as a partnership, you’re probably familiar with the sting of self-employment taxes. Unlike shareholder-employees of an S corporation, who only pay Social Security and Medicare taxes on their salaries, partners typically get hit with self-employment taxes on their entire share of the business’s net income. That can add up fast. By transitioning to an S corporation, you can restructure how you take your income—splitting it between salary and profit distributions. The big advantage? Those profit distributions are not subject to self-employment tax, potentially saving you thousands each year. So, if reducing your tax burden sounds appealing, let’s break down how a tax-free Section 351 incorporation works and what you need to know before making the move.
The Succession Plan You Keep Meaning to Write
I have a friend who has been retiring “in about two years” for the last five years. He is 67, runs a successful practice with about 400 returns, and specializes in tax planning. He has never had the practice valued. He also has no succession plan in the event he does not come back from his next fishing trip. This is not unusual. This is typical. The 2020 American Institute of Certified Public Accountants (AICPA) firm succession survey found that only 6% of solo and sole practitioners had a practice continuation agreement in place. Nearly half of those surveyed said they knew they needed one and had no idea how to start. That second figure is the one that gets me, because it is not denial. Our colleagues know exactly what is at stake and are stuck. Let us get unstuck.
