Published by AE Tax Advisors Team • 2025-11-20

Husband-Wife LLC Restructuring Delivers $35,000 in Annual Savings

The Client

Kevin and Jenna Marshall operated a successful home renovation business in Richmond, Virginia, as a multi-member LLC taxed as a partnership. The business generated $320,000 in annual net income, split equally between the spouses.

The Problem

As LLC members, both Kevin and Jenna were paying self-employment tax on their entire $160,000 share -- approximately $22,600 each in SE tax, totaling $45,200 annually. Additionally, the partnership structure required filing a separate Form 1065 and issuing K-1s, adding complexity without any tax benefit.

Our Strategy

We restructured the LLC to elect S-Corporation tax treatment. We set reasonable salaries at $75,000 each ($150,000 total), benchmarked against construction industry compensation data. The remaining $170,000 would flow through as S-Corp distributions not subject to self-employment tax. We also implemented an accountable plan for vehicle expenses and tools, and established individual Solo 401(k) contributions.

The Results

The S-Corp election eliminated approximately $26,000 in self-employment taxes on the $170,000 in distributions. Combined with the accountable plan deductions, retirement contribution benefits, and QBI deduction optimization, total annual savings reached $35,000. The Marshalls used the savings to purchase a work truck and expand their service area.

Key Takeaway

Husband-wife LLCs taxed as partnerships are frequently overpaying self-employment taxes. Electing S-Corp status with properly benchmarked salaries can eliminate SE tax on distributions while maintaining the liability protection of the LLC.