The Starting Point
The client owned and operated two Bergen County restaurants under a single-member LLC. Annual combined revenue exceeded $2 million; net business profit ran approximately $280,000. The owner had been with the same general-practice CPA for eight years.
Three structural problems were creating ongoing tax overpayment:
- Single-member LLC structure — all $280K of net profit was subject to self-employment tax (15.3% on the first $184,500, 2.9% Medicare above). Estimated annual SE tax: ~$30,000.
- No retirement plan — eight years operating without a SEP-IRA, Solo 401(k), or any qualified plan. Lost annual deduction opportunity: ~$30,000-$60,000.
- Missed FICA tip credit — the prior CPA had never filed Form 8846 for the FICA tip credit, despite both restaurants having tipped employees. Estimated annual missed credit: ~$8,000-$12,000.
The ProAxis Approach
Initial diagnostic took 45 days. ProAxis reviewed the prior three years of returns, the LLC operating agreement, and twelve months of bank and POS data. The plan unfolded in four sequenced moves:
1. Reorganize as an S-Corporation
Filed IRS Form 2553 to elect S-Corporation status for the LLC. Set up payroll for the owner with a documented reasonable compensation analysis (~$135,000 W-2 salary supported by industry comparables for a multi-unit restaurant operator). Remaining $145,000 of net profit flows through as a distribution NOT subject to self-employment tax. Estimated annual SE tax savings: ~$22,000.
2. Establish a SEP-IRA
Set up a Simplified Employee Pension (SEP-IRA) at a low-cost custodian. Owner contributed 25% of W-2 compensation (~$33,750 in year one), fully deductible at the federal level. Future-year planning includes evaluating a defined-benefit plan once owner is age 50+ for $100,000+ contribution capacity.
3. Capture the FICA Tip Credit
Filed Form 8846 for the current year (~$10,500 federal credit). Filed Form 1040-X amendments for the prior three open tax years to claim the missed credit (~$28,000 federal refund spread across 2022, 2023, 2024 returns).
4. Set Up Tax-Aware Bookkeeping
Migrated from a generic bookkeeper to ProAxis CPA-supervised bookkeeping. Implemented daily POS-to-bank reconciliation (Toast integration), weekly food cost reporting, and monthly P&L review with the owner. Set up the chart of accounts to track FICA tip credit data automatically going forward.
The Outcomes (First Full Year After Restructure)
- Self-employment tax reduction: ~$22,000/year ongoing
- SEP-IRA deduction: ~$33,750 deducted in year one (~$8,440 federal tax savings at 25% bracket)
- FICA tip credit: ~$10,500/year ongoing federal credit
- Recovery of prior-year missed credits: ~$28,000 one-time refund via Form 1040-X amendments
- Total Year-One Federal Tax Savings: $47,000+ (recurring annual savings exceed $40K going forward)
Key Lessons
- The $60K rule. Single-member LLC owners with $60,000+ annual net profit should run the S-Corp election analysis. For a $280K business, the SE tax savings are dramatic.
- Restaurants leave money on the table when their CPA isn't a restaurant specialist. The FICA tip credit is missed roughly 4 out of 5 times when restaurants switch to ProAxis from generalist firms.
- Retirement plans pair with entity changes. The S-Corp election created the W-2 wage that made SEP-IRA contributions possible. The two strategies stack — neither alone delivers the full benefit.
- Form 1040-X amendments recover the past. The $28K one-time refund came from amending three years of prior returns to claim the missed FICA tip credit. Most tax positions can be amended within three years of the original filing date.
Related ProAxis Services Used in This Engagement
Anonymized to protect client confidentiality. Identifying details (specific restaurant names, exact addresses, ownership structure details) have been changed. Dollar amounts, tax issues, restructuring sequence, and outcomes are accurate.