Discussion:LLC taxation
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Discussion Forum Index --> Tax Questions --> LLC taxation
| 30 April 2010 | |
| I have a client that has set himself up a single member LLC, and has it classified as a S Corporation. He plans to keep his current job and run the business on the side. He plans to pay himself a salary and pay payroll taxes. And in my effort to give the best ways for people to do things I thought this was the best way for him to go. So my question is even if he gives himself a salary does he have to claim this as self employment as well? | |
Seaside CPA (talk|edits) said: | 30 April 2010 |
| Income from an S-Corp is not subject to self-employment taxes. Client will be taxed on his wages, as well as the S-Corp profit that flows through to him. However, he will not pay s/e tax on any of it. | |
| 30 April 2010 | |
| I thought as much, but it always feels better to have someone else re assure you on matters that I have not directly dealt with before | |
| April 30, 2010 | |
| Should have NOT classified it as an S tho'. He cannot have excess SS tax paid on the employer side refunded. As an LLC/1065, it's an SE calc which includes other W2's and SE income. Maybe it won't matter if he's not earning 100k. | |
| 30 April 2010 | |
| definitely not earning a 100k, so what would you have advised him to do | |
| April 30, 2010 | |
| If there's a chance he'd hit the SS ceiling in the next few years, remain an LLC/1065. Whenever there are multiple sources of earned income, that's your best bet since there's never a way to overpay SS taxes. Otherwise, I always like S corps! Well, except, then he has to pay you to do quarterly payroll filings as well. If he has no other PR and no sales tax, then LLC keeps his accounting costs to a minimum as well. So a lot of upside to keeping it simple. | |
| 30 April 2010 | |
| True, but I think the way he sees it is that he is saving by paying himself a salary and keeping the money in the company instead of paying himself a dividend | |
| April 30, 2010 | |
| Who allowed him to think? Duh. That's in contrast to a C corp, not a 1065. Happy you, you get to get paid quarterly now for easy work. | |
| 30 April 2010 | |
| This is a single-member LLC -- no 1065, just a Schedule C if the S election had not been made. But JR's point is right on. However, depending on how high the client's regular salary is, he may be saving some payroll taxes by paying himself a salary and letting the rest of the business income go on the K-1, where it is not subject to SE tax. You just have to watch the amounts (as JR says, you'll never get back the employer's 1/2 of the FICA tax even though the employee's total earned income is over the FICA limit) and juggle the conflicting issues -- keeping the S corp salary high enough to be "reasonable" but low enough not to take him over the FICA limit. | |
Michaelstar (talk|edits) said: | 30 April 2010 |
| I do question the S-Corp election as a SMLLC though.
Had he not made that election as Katie points out - only a Schedule C would need to be filed. Also, with this t/p also earning wages from another source - as a Schedule C - SMLLC, no p/r t/r's and no way to "overpay" any employer p/r taxes. Sounds like excess accounting/tax prep fees as well in my opinion. | |
| April 30, 2010 | |
| Missed the single member thing, sorry. Doesn't change much tho'. | |
| 30 April 2010 | |
| Yes, I agree with JR and Michael -- I would probably suggest the client revoke the S election for 2011, all else being equal. | |
| April 30, 2010 | |
| Revoking the S election leaves him a C corporation, unless you meant to liquidate.
There is no concern about the reasonability of compensation as long as there are no distributions. This may create income tax problems in the future, but as far as FICA goes, this is the best solution. | |
| 30 April 2010 | |
| Yes, of course, LH, he would have to "check the box" to revert to disregarded entity status. Which would mean that in effect the corporation liquidates and distributes all of its assets to the owner. Probably not a big problem early in the entity's history -- it probably doesn't have much appreciated property on which gain would be recognized at the distribution. Of course, if the owner contributed appreciated property to the LLC when he organized it, the liquidation might trigger an unacceptable gain.
I was thinking the owner/employee might need to take some distributions in excess of his salary to keep his total salaries below the FICA limit and still make ends meet -- a balancing act. | |
Tampa Taxman (talk|edits) said: | 1 May 2010 |
| There are many factors. Home office deductions favor disregarded entity. Excess FICA (from multiple jobs) favors disregarded entity. Tax prep and other compliance fees favor disregarded entity. (Newly added: late filing penalties favor disregarded entity.) Unemployment taxes favor disregarded entity. Contribution of built-in-gain property favors disregarded entity. Ownership of real estate supposedly favors disregarded entity (though frankly I don't completely understand this one). But income in excess of reasonable compensation favors S-corp. Lack of need to file estimated payments also often favors S-corp.
In general, low income businesses are usually better off going with disregarded entity, mainly due to tax prep and other compliance fees. Higher income businesses usually favor S-corp due to income in excess of reasonable compensation not being subject to FICA tax, at least if they can get their act together, provide information to their accountant on time, and file everything on time. I usually recommend for people to start out as a disregarded entity, and only would advocate switching to an S-corp after working with them for a while. It's not worth the headaches chasing people down when they refuse to file quarterlies on time, even if it does mean somewhat higher fees (and not always that much higher - a disregarded entity still can benefit from regular write-up work). Fortunately, switching from disregarded entity to S-corp is nice and painless, when that time does come around. | |
