What Is The Best Type Of Business Entity For An Amazon Seller?
The top consideration for most Amazon sellers when forming a business entity is minimizing income taxes. Most sellers form a single-member LLC. Sometimes it makes sense to elect to be taxed as an S corporation. Whether that makes sense or not depends on 3 things:
How much money you make in wages (W-2) outside the business
How much money the business will make in a year
How much time do you devote to the business in terms of average weekly hours?
Let’s address #1 first. In 2023 if you make $160,200 or more in W-2 wages, there will be very little benefit realized by electing to be taxed as an S corporation. Form a single-member LLC and keep it simple. If you make less than $160,200 or more in W-2 wages like the vast majority of my clients, move on to consideration #2.
Now let’s address #2. How much net profit will the business earn in a year? If $50,000 or less, there will be very little benefit realized by electing to be taxed as an S corporation. Form a single-member LLC and keep it simple. If you plan to earn a net profit of more than $50,000, then you should definitely consider electing to be taxed as an s corporation.
Now let’s address#3. How much time do you devote to the business in terms of average weekly hours? This will weigh heavily on the amount of tax benefit you can receive from electing to be taxed as an S corporation. Generally speaking, the more time you devote to the business, the higher the business net profit must be to realize a benefit.
There is a very fine balance between W-2 income, business net profit, and time devoted to the business to determine your actual tax savings. It’s impossible to generalize here so I will give you a specific example.
Let’s say you run an Amazon seller business that will earn a $100,000 net profit and you work in the business 20 hours per week. We determine that reasonable compensation for you as an officer as an S corporation is $45,000 based on a number of factors that the IRS requires you to consider. Your federal tax savings in this situation are approximately $7,771. If you worked 40 hours per week with the same net profit and same hourly salary, your federal tax savings in this situation would be $1,412.
By this example you can see how the more time you devote to the business, the higher your net profit must be to make electing to be taxed as an S corporation worthwhile. Keep in mind that this example is extremely simplified and you need to consult with us to determine your actual tax savings.
