Updated. I have been the President and CEO of a profitable US corporation for over 10 years. I’m also all the other executive positions – CIO, CFO, COO – as there is only one employee (me). Here’s a brief overview of why I chose to incorporate my business into an S-corporation. Please don’t take this as tax advice, this is simply an explanation of my own actions.
I chose to an S-Corporation over an LLC for a variety of reasons (some of which I don’t remember anymore), but one of them was – why else? – to save some money. I wrote a wordy post years back – Forming An S-Corporation To Reduce Self-Employment Taxes. Here’s a more concise example from MyCorporation, a website that will complete and file the incorporation documents for a fee*:
In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to self-employment tax.
Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000. As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.
Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit. But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!
I must add that the IRS states that the salary has to be “reasonable” based on the compensation of similar work elsewhere, so don’t get crazy with this. You can’t pay yourself $20 and a Diet Coke.
If you have a single-person LLC, the default tax situation is very similar to that of a sole-proprietorship. The income passes through to an individual’s tax return on Schedule C. However, there are other benefits like limited liability protection of personal assets. (You can also choose to have the LLC taxed as an S-Corporation. Confused yet? I would consult a local attorney for more details on this.)
Additional costs of S-Corporations. As an employer, the S-Corporation has to pay unemployment taxes. The exact rate varies from state to state, but the federal minimum is about $450 per year if your annual income is at least $7,000. However, as both the employer and employee, it is difficult for me to “lay myself off” and claim unemployment benefits. You may also be required to provide other benefits as required by your local area, such as short-term disability insurance.
In addition, I have to run payroll for myself. You can deal with all the federal, state, and local employment forms yourself, which I did for a while, but it can get tedious and the penalties for mistakes can be high. You can also hire a professional payroll service, which can run from $30 to $100 a month.
These additional S-Corp costs can quickly add up to over a thousand dollars per year. As a result, if I had a relatively small income, I would have been better off either staying a sole proprietorship or with a single-member LLC (taxed as a sole proprietorship). The S-Corp starts becoming more worthwhile as the annual profits increase.
Additional costs of LLCs. LLCs can also be subject to state-specific fees. For example, the state of California charges an annual minimum franchise tax of $800 to both S-Corps and LLCs.
Bottom line. There are many facets to the S-Corporation vs. LLC discussion. Unfortunately, it can get quite complicated. I’ve just tried to provide an example of potential differences in taxation and payroll expenses.
* I actually used LegalZoom to file my incorporation papers, which is their main competitor. I don’t really remember any big differences between them, but was happy with my Legalzoom experience.
The Best Credit Card Bonus Offers – November 2024
Big List of Free Stocks from Brokerage Apps
Best Interest Rates on Cash - November 2024
Free Credit Scores x 3 + Free Credit Monitoring
Best No Fee 0% APR Balance Transfer Offers
Little-Known Cellular Data Plans That Can Save Big Money
How To Haggle Your Cable or Direct TV Bill
Big List of Free Consumer Data Reports (Credit, Rent, Work)
So when you file your taxes… do you have to file the company’s taxes separate… at which point you send yourself a W-2?? Or are you somehow able to combine it all into one tax filing? I’d like to hear your results after you file your taxes for 2008 if you haven’t already, or your experiences with it overall.
I’m wondering how the tax computations would pan out if the S-Corporation would be formed as a joint venture (i.e. two co founders). What if one resides in one state and another one in a different state? What if the S-Corporation is multi-national (i.e. one co fonder in US and one in Canada)?
I’m a big fan of the S-Corp. It’s my recommendation for most clients. Avoiding the SE tax is a big help, especially come April 15. Many people, regardless of what I tell them, are always shocked to see a jacked up tax bill because they forgot their freaking SE tax.
One of the draw backs for the S-Corp is that you have to file an 1120S. From that you get the K-1, which flows through to the 1040 personal return. Single member LLCs don’t have to file a separate return, just the Schedule C on the personal return. The accounting requirements/fees just go way up with an S-Corp.
Another draw back to the S-Corp is that there is no way around quarterly filings for payroll. Many sole props/SM-LLCs don’t have any employees so you can just do “protective” filings (payroll returns with zeros across the board). I’ve had a lot of clients that find out the hard way that the IRS plays games with income taxes, but they are DEAD SERIOUS about payroll taxes.
The other thing about S-Corps is that you have to a “reasonable salary.” But what the hell is a “reasonable salary” for the owner, CEO, CFO, secretary, and lead plumber all rolled into one person? The IRS is so upside down right now, though, I’ve seen people get away with not even paying themselves a salary for years. Sigh…Also, reasonable salary has absolutely nothing to do with your profit for the year.
Zack
I have a number of question s – we are just trying to form a S Corp for my husband’s real estate business and rental properties – and would like to employ a CPA
Is there a way to contact you over phone or email ?
My email – latha.narayannan@gmail.com
I think another option is to open up an LLC but elect to be taxed as an S-Corp. As I understand it gives you best of both worlds.
Additionally, 50% of SE tax is deductible so something to keep in mind as well.
Here, here for the S-corp. Pass through that income baby. Social Security isn’t going to be around when we’re old enough to collect it, so why pay into it!
Now, with all this hyperinflation talk around the corner, I wonder if now is the best time to start buying everything I might need for the next 5 years and stop hoarding cash.
10 pairs of sneakers, check…
500 rolls of toilet paper, check…
heh
Miranda- What your accountant is probably doing is allocating percentage owned by you and your husband. The distributions do not factor in at all, unless you’re distributing beyond basis. I would hope the acct has you filing the Form 1065 and putting you in as passive, husband as active.
My accountant reduces my taxes for the LLC by changing up the distributions. My partner (my husband) actually receives most of the distributions, so that my SE tax is lower. It works out well, and upon analysis, I save just as much with the LLC as with the S-Corp. — but the accounting procedure isn’t as involved.
One thing to also keep in mind in your personal liability. I am not 100% sure on this but incorporating as a LLC actually removes your personal assets from the equation if someone decided to sue you or if your business goes bankrupt. Is this also true for a S-Corp?
I have an S-corp. It is a good point made about tax prep, as you need to generate the 1120S and K1, but those expenses are fully tax deductible as well.
The benefits of not paying as much in FICA taxes greatly outweighs the formation and tax prep costs for a profitable S-corp however.
Another thing that I do is I’ve set up a solo-401K. As an example, a person paying themselves $60K in salary could sock away as much as $30K into a solo-401K if they wanted to. Significantly lowering your tax burden.
One point not brought up is that by paying less in FICA now, that could possibly affect the amount you eventually receive from Social Security. Looking at the shape Social Security is in, I think I’m happy to take the immediate benefit.
@Maury – My accountant always asks me every time we meet “you are putting your fica savings into your retirement accounts, right?” that’s exactly what I do.
@jacob – LLC or S-corp, if a lawyer is good enough, they can always strip away the “veil of liability”. With these types of situations, it’s best to ignore any legal benefit. After all, it’s just a few pieces of paper that separates an individual from an LLC or corporation. They aren’t exactly like waiver’s signed by your customers excusing you from responsibility.
If I have “XYZ Co.” It isn’t an LLC or corp. How do I go about doing the taxes and trying to save money on the taxes for sales done in 2008? I purchased home and business turbotax.
But what about the corporate taxes?
The S-corp still has to pay corporate tax on the corporate profit that you did not distribute to yourself as salary.
Yes, this is usually lower than income tax, but if you count the extra accounting an S-corp has to do (shareholder meetings, extra tax filings), it’s almost a wash.
Quite the opposite, Scorp does not have any corporate taxes, it is a flow-through.
The “free” MyCorporation “deal” is a scam – in my old state it cost 50 bucks to set up LLC get EIN and a-Corp status from the Feds total – all with a simple fax. They still want like $150 after the supposed deal.
Also to the guy who’s thinks SS is a mess – take a look at how 401ks have done … SS will pay out. Period.
As a CPA I mostly agree with Zack. Good points. We generally don’t recommend S Corps to our smaller clients because of all the expenses involved.
I disagree with the statement about the IRS not caring if you pay out salaries. I can assure you they care. We have a lot of personal service clients (mostly doctors). It’s actually a high audit area for our client base. BUT that being said, we tend to the conservative side. Most of them pull at minimum $230k salary for full retirement benefits (They can then put $46k into profit sharing/401k, tax-free). I have heard some pretty lenient formulas, like $30k salary would suffice even for some of our clients. But I would never recommend a profitable S Corp. take no salary unless they want IRS knocking on their door.
BTW – to Steve – there is no corp. tax at the federal level, on S corps! Some states do tax, but it is pennies. California is a whopping 1.5%.
Steve,
I’m not sure that is entirely accurate… An S-corp does not pay taxes like a C-Corp does. S-corp earnings (whether distributed to shareholders or not) are included on the shareholders taxes. There is an informational filing given to shareholders (K1) but that is it.
Shareholder meetings take me all of 30 seconds. I have a template, and once a year I change the date, print it out and sign it.
Someone does my S-corp taxes for $300… So the FICA savings on $2000 alone covers that.
For each $1000 more I take as distributions instead of salary, I save $145. On $40,000 that would be close to $6K less in taxes I pay.
It is WELL worth it to form an S-corp if the business is profitable. Otherwise, you are just giving away 14.5% of your income that you don’t have to.
Jacob, Justin- Lawyers can usually get around the corp/LLC to the owner because of co-mingled assets. The more formal you keep the business and your personal stuff, the better protected you’ll be. Don’t go buying stuff for yourself personally with the business money, don’t loan money to the business without paperwork, etc.
Boo – You’ll have to fill out a Schedule C for 2008. This is just a schedule on your personal tax return just like itemizing your deductions. If you’re dealing with a good amount money, you will probably want to see a professional to learn the ropes. Then you can decide if you want to do it on your own. You also really need to file a DBA with the state. You should probably just go ahead and get an LLC.
Steve – Sorry, but you’re wrong on that. All income flows through to shareholders and is taxed at the individual level, as Maury said.
I think it’s also important to note that the S-Corp doesn’t make a lick of difference in courts (excluding tax court). S status is known as a “check the box election.” Only the IRS really cares.
we (wife and I ) did the same thing went from sole to s-corp
saved about $8.000.00 a year..
Couple questions that I don’t believe are covered above –
1) Doesn’t Corporate tax need to be paid by the S-Corp?
2) You will have to pay additional tax on your 1040 for the salary portion
3) Any additional distributions (ie. dividends) back to you for earnings in excess of your salary will be taxed?
Maybe I’m off base, but it doesn’t seem like everything is being included above
@york
1) was covered and recovered
2) Yes.
3) Yes, but you don’t pay fica on this amount. That’s where the savings comes into play.
Not correct. You never pay tax on distributions!! You pay tax on the profits. Even if you take NO distributions, you WILL still pay the tax on the company profits. Hence the “Pass-through” taxation on LLCs and Scorps.
I’m new at this, so please correct me if I’m wrong. This incorporated advantage only applies to those who own their own business, or is able to work as an independent contractor for a company and go through 1099 status right? If the company is only willing to hire you as their employee and only issue a W2, then this is not possible. If there is a way around this, I would love to know. Much thanks.
Off topic, but Johnatan hasn’t posted in a few days. Anyone have word if he is taking some time to himself away from the blog, or a vacation? Just curious.
Hello – so if you have to do a tax return for the S Corp but there is no taxes on an S Corp then why do you need to complete a tax return? Just curious..
Informational purposes.
NY GUY – Are you sure you are getting refreshed version of the site?
Karla – S-Corp needs to file so you can figure out profits/expenses/capital, which shows how much flows to shareholders. Then the shareholders get a K-1 form listing their share of the income.
Very strange, I wasnt getting refreshed pages of the site. I have never had that happen to me before. Oh welp, I have a few days of read to catch-up on now.
Good to know nothing bad happended, as I thought you just stopped posting unexpectedly and without notice.
Might be a problem on my end with my cache plugin, but visitor counts seem to be normal. Feel free to let me know if it happens again.
I’m in CA. We are a LLC filing as an ‘s’ corp. First time. Old accountant said pay my husband payroll and pay taxes etc. file 941 and so on. He died. New accountant says we should not have paid payroll and get it all back from feds. Called IRS and they said we did right. Called new accountant back with IRS news and he said they must not have understood we are a LLC filing as s corp not s corp. Ready to scream. Please help!!!!
Julia-
Fire your new accountant.
When you “check the box” to file as an S-Corp, you essentially become an S-Corp in the IRS’s eyes. Meaning you do officer salary, file an 1120S, etc. You did right by filing the payroll returns.
I am an s corp filing with a K1. I have not taken any payroll taxes out during 2008. Do I need to file a Schedule SE along with my 1040 and pay self employment tax? Or is that coming out of my taxable income on my 1040?
I’M CONFUSED!
I am switching from sole to a one person S corp. My question is whether it’s better to give myself a larger salary or take more distributions? My accountant seems to want me to take as minimal a salary as I can (just enough to cover my monthly bills) and take distributions when I need more money. Do you all agree??
i have the same problem as george. I never gave myself a payroll. I just took money out of the business account when I needed it. (first year as s corp, didn’t know any better) So now how do I claim that income? on my k1? or as other income on my 1040? Or do I w2 myself now? I used taxcut software and am just hung up on this one spot.
George, Jana-
1) You guys should really consider getting a professional.
2) DO NOT complete Schedule SE. At this point, it’s too late to really do anything about not taking payroll previously. See #1 above.
3) Distributions aren’t income as long as you did not exceed your basis. Accordingly, see #1.
I actually had mine done by a professional and they were going to include a Schedule SE, and a schedule C that was just zero’d out, but it didn’t seam right to me so I didn’t file it yet.
So from what I gather the correct way to do this for this year would be to take a salary in which I pay payroll Taxes on filing quarterly and I will W2 myself at the end of the year?
Then anything extra comes out as a distribution?
Your help is greatly appreciated.
Being a SBO myself working as a consultant, I found LLC and SCorp works the same ways. Right now, I have my company as LLC
I take out Guarantee payments which is counted as an expense for LLC. As per tax goes, I only pay SE tax for the guaurantee pay and not the business income. So that it works same way as Scorp. You don’t have to form Scorp just to save on SE tax as it can be done via LLC as well. You also don’t have the hassle of filing quaterly reports.
But there are obvious drawbacks to LLC. You can own a health insurance account in LLC (husband and wife). I think its tough to do Solo 401 but can do SEP and so froth.
I also learn few things about scorp here. Good stuff!!
vijaianand-
Except that you’re wrong. On almost everything you said…You need an accountant with good business tax experience.
Can you explain what exactly is wrong? I know I stated “You can own a health insurance account in LLC (husband and wife). ” It should be “You can have your own a health insurance account in LLC (husband and wife) to claim the insurance reimbursement ”
I usually don’t claim something just because I know it. I do research and learn from other mistakes. Here is some titbits from different tax guys,.
Check out this link
http://www.taxalmanac.org/index.php/Discussion:SE_Income_from_an_LLC
Check out this website. They have lot of discussions on this topic..
Please don’t just claim something wrong without any proof.
Vijai
Vijai-
1) I didn’t explain why you were wrong cause it’s tax season. I’m a tad busy.
2) You were wrong on several things. You really should see a pro, if only to see the general format and then ditch them later. I tend to think it’s a little low brow, but people will continue to do it for all time.
3) I’m well aware of TaxAlmanac.org.
4) The link you posted seems to have little to do with what you were talking about previously. Unless you’re speaking about return of capital or LLC use of personal property. But then you have capital gains and/or rental income, just complicating your return, and daring the IRS to look at your stuff. To quote Tom04 from your link: “However, any distributive share of ordinary LLC ordinary income and guaranteed payments are subject to SE tax.” And Tom04 about designating some payments as return of capital: “I have ran across a return where the preparer designated a portion of the guaranteed payments as return of capital and deducted this amount from SE income. However, I don’t see any basis for this approach.” I completely and totally agree with Tom04 on this. The IRS would also agree, otherwise there would be no point to an S-Corp! Please also note that the return of capital would have also been previously taxed as income, so this isn’t a magic tax loophole.
Having said all of that, I still think you should see a professional with good, solid business tax experience (See #2). And be careful on TaxAlmanac.org…they tend to talk about VERY specific situations.
-Zack, CPA
Zack,
Can you tell what exactly is wrong? I know the health portion I got it other way around. I actually posted a comment with website link which is discussed by many tax preparers, CPA’s and very broadly on this topic. I guess its stuck for moderation..
I usually don’t comment on things unless i am pretty sure after all the research.. You can check out once its posted and let me know.
Vijai
Zack, actually I been looking out for a tax guy who can my return since its bit complicated for this year. I did for last year with only W2’s but this year I have contract job and with retnal income and stocks and so forth got too complicated. I managed to do my 1065 for LLC but still few questions unanswered. My hunt is still on because no guy is expert in everything and everybody says different. I did check out a lady as you said but she was totaly wrongly telling me to file Sch. C which is only for sole propertorship.
Anyway coming back, I think I am write about telling you can take Guarantee pay for partnership from LLC which is an expense and pay SE tax. I am still trying to find after all deductions, whether on the business income I need to pay SE tax as well since its a multimember partnership. SCorp is different compared to LLC but not a lot according to may CPA’s I talked to. There expense and Income flows the same except you get to pay yourself a salary and company deducts the FICA instead of LLC you pay SE Tax. The end of year profit still flows to the 1040 as distribution like LLC. So they are almost as per my research. Please correct me if I am wrong whenever you get a chance.
Also according to biztaxtalk.com discussion, its is tough to form a self health insurance in LLC but easy in SCorp which is good. So they both have pro’s and con’s but LLC is less hassle and still have advantages.
Please just let me know whether the end of your profit income from the business has to deduct SE Tax for multimember partnership as per you.
Thanks
Actually, if it is a single member LLC you only need to file the Sch C. Some firms make people do the Form 1065 for all LLCs, but there’s no legal requirement behind this. I think it’s for two reason, neither of which benefit the client: 1) You limit the firm’s liability to one form or the other (the all the eggs in one basket type deal). 2) Boost up fees for more prep work. Now, if it is a multi-partner LLC then you file the Form 1065.
The guaranteed payments can absolutely be taken as an expense for the LLC. However, for example, say the LLC profits (before any GPs) 100,000. You take 60,000 as a GP. You pay SE tax on that GP. Then the LLC shows 40,000 profit. You still have to pay SE tax on the LLC’s after GP profit. So now you have 60,000 SE income from the GP and another 40,000 SE income from LLC profits, for a total of $100,000 in SE income. So GPs are a wash in a single member LLC.
In a multi-member, GPs can be used to pay a member for work/services performed beyond the partnership agreement. For example, say there’s a coffee shop owned by a couple of guys. The partners usually only do managerial duties, etc. One of the baristas ups and quits. So one of the members ends up working the shop for a few weeks, which is beyond the management duties he usually performs. The partnership agrees to pay him for that. I’ve also seen them used for health insurance purposes. I actually rarely see them. There are situations where they help, but it’s usually not worth it.
What you’re missing in this whole discussion is FICA/SE tax. This is where S-Corps and LLCs really differ in a VERY significant way. Reread this article. Say the LLC had made 100,000 (No GP since they would be a wash) and S-Corp made 100,000 (before owner’s salary). Reasonable salary is 35,000. You pay FICA on that. Then you only pay income tax on the remaining 65,000. Whereas on the LLC you would pay SE (ie, FICA) on 100,000. So you would save 65,000 x 15.3% = $9,945 (roughly speaking, naturally). If you can handle the additional overhead on accounting fees, the S-Corp is usually worth it.
Remember, reasonable salary in an S-Corp has NOTHING to do with profits. I’ve never seen that withstand audit. Employees always get paid, regardless of financial performance. Well, besides bonuses that is.
Also, don’t go preparing tax returns off what some random guy says on the internet. Keep looking for somebody. They will sign the return and give you that barrier of protection. Open your wallet and get at least an EA. I would go with the CPA since they tend to be better with businesses in my experience. Just be aware you’re talking some scratch either way.
Zack,
Thank you for taking time to explain in detail.I appreciate it with all the examples. But I was told and read in books that profits from LLC for a multi member doesn’t have to be considered for SE tax. But you were saying, it has to be considered. Since its a partnership, doesn’t it flow only thru the return as a income and pay income taxe like any other income from rental property. Why does it have to be counted for SE tax? Every person/CPA I talk to say it differently. I might have to call the IRS SBA line and verify it.
Also, thanks for advise on going with a CPA. I am actually looking for one and don’t have problem paying but I am having tough time find the right person. They are also asking too much which is what killing me because I almost got it complete except few things. Will keep trying.
Thank you again!!!
VIJAI
I am a new s-corp formed from an LLC in 2008, sole shareholder, only employee. I wonder if someone can explain to me why “friends” try to drain their own s-corp accounts to $0 at year end. I take a regular $24k payroll, pay regular taxes and take an occasional distribution throughout the year for unexpected personal expenses, but minimal. I was fortunate to have good gigs last year and ended up w/ $26k in the S-corp account, which then was put onto my personal taxes. I just can’t see taking a huge distribution like that and avoiding the IRS! Also did I avoid paying FICA on that $26k?
What am I missing?
Amy-
I assume you’re talking checking accounts…I the S-Corps are cash basis and that they are just loading up on expenses. Otherwise, they get to pay tax on any income not spent on expenses. They might be committing some tom-foolery, but you don’t want to copy that anyways. And yes, from the description you’ve given there was no FICA on that 26k, assuming it was all profits and assuming your accountant did not accrue some salary at the end of the year.
I am still trying to understand one thing. Can I form as a single member LLC but then file as an S corp for tax purposes? Does this get me around the SE taxes beyond my reasonable income…without the extra paperwork? My only purpose in forming is for the SE tax break. Or do I need to form as an S corp?
Vijai-
I think what you might be talking about is active versus passive.
I’ve done some more research on this, and I actually found something (a footnote in a resource book) that backs what you were saying earlier. Boils down to this: there are no court cases to back this, but word of mouth from a tax seminar guy says that IRS auditors allowed GPs for reasonable salary in an S-Corp and the rest as only taxable for income tax (SE tax exempt).
This still strikes me and my coworkers as an incredibly aggressive position. And I mean INCREDIBLY AGGRESSIVE. The firm I where I work tries to stay off the IRS’s “radar.” We don’t like audits, clients don’t like audits. We would never take this position without substantive authority on this (eg court case, rulings, etc) and this second hand gossip would not cut it. This also goes contrary to every return I’ve ever seen done by other firms (incl. big four, specialty accounting firms). And lastly, why take such a position when you could just elect S-Corp?…
Allow me to amend what I said earlier: instead of an accountant, you may want to consider a tax attorney. Tax attorneys are typically more willing to take iffy positions. If they are willing to sign the return, go for it. Just be sure to ask about penalties and interest on this sort of thing. And keep in mind that you’ll probably receive notices about it and accounting fees add up quickly.
Rebecca-
There’s tons of extra paperwork, but yes, you can elect corp status then S-Corp status for an LLC.
I have a perculiar situation and have read the insightfull contributions on this board. I believe I am in the right track but still want to explain my situation and I will appreciate some feedback…
I am single owned S corp, who also have a full time w2 employment. My S corp is in a startup phase right now.
I did not pay estimated taxes; after expenses & loses; S corp distributed income was about $4K. Before this, I have paid myself a salary of $4k and dividend of $1K. I have already filed 1099-div/w2/w3/1096 for the $4K & $1k payments to myself.
Question:
Should I be worried about SE on the $4k salary?In my other job, I make well above $100K; so I would have contributed more than the max of FICA there, except the medicare portion of FICA. I also use a tax preparation software, that automatically calculates my total income against my withholdings and tells me if I have a return and how much or if I own uncle sam and how much.
Since money get taken out of my other job and uncle sam owes me money at the end of the day, do I really need to border about paying estimated taxes? In my other job, I am claming zero dependent, but I actually have 4 dependents that I will claim during tax filing, I did this so that uncle same to get a larger share upfront.
I also intend on reporting the income of $4k as indicated in my K1 in my personal tax filings, along with the $4K w2 and $1K 1099-div and w2 from my day job and leave the rest to my turbo tax or Taxact software to figure out the rest. comments…
I need HELP! please! I incorporated as sole shareholder in May 08 with the state. After doing so and spending some monies to start my business, I had a ‘situation’ that caused me to put everything hold. Now I find out I have to pay myself a salary and claim it as income on my 1040. (yes, I know I need a pro but, as noted, with the company on hold, I made $0 from it in ’08). I did volunteer to a client who was suppose to, in return, help me advertise to other businesses. My question is, what is a “reasonable executive salary” if I made no money? Also, can I claim any of my expenses? If so, can the negative dollar amount on my 1120 be put into my 1040 somewhere to help? I’m lost here.
Zack
Thank you for taking time to do some research. I am totally with you. I don’t want to get audited as well and dig my own hole. So I actually decided to go the route which is usual for LLC. I ended up paying taxes for the full business income including GP. I am thinking of electing the SCorp status this year so I can file differently next year. I might have to file an election form to change to SCorp which I need to find out. If you can just share the process that would help whenever you get a chance.
Thank for helping us on your busy schedule.
VIJAI
Vijai-
I think it’s Form 2553 if you’re already a C-Corp. Otherwise, you have to fill out another form to elect corporate taxation then elect S-Corp. It’s not hard; just “check the box.”
Sandra-
This is one of those situations that you really have to sit down and discuss with someone. You can probably take some of the expenses. You’ll probably be okay without the salary due to -0- income and limited operating time. Yes, any losses from the S-Corp can help on your personal return.
Stance-
You’ve got several issues here that I don’t have time to go into. Other than that, this is truly an impossible question to answer without seeing your previous returns, last year’s information, basically everything. Best advice: be prepared to open your heart and wallet. Also, get a professional!
Zack,
I have done a lot of research online and talked to IRS with no help with what to do regarding the “compensation” and according to the IRS I have to file the 1120s and the 2553 (I think) by March 15 at the latest. If I set forth that my salary is only say… $25 a week plus a certain percentage of profits, will it raise red flag?
Sandra-
Form 7004 is your friend. http://www.irs.gov/pub/irs-pdf/f7004.pdf
If you do salary for previous years (eg 2008), you have to go back and file Forms 941, Form 940, and any state forms. This would cause significant penalties and interest compounded daily and headaches and nightmares… You might be better off not including a salary at this point. However, if you are going to continue the S-Corp, you need to get on top of the IRS ball.
Also profits do not key into “Reasonable Salary” at all. There a lot of questions that go into salary determination, incl. hours worked, responsibilities, employees overseen, etc. Just like a normal job.
Maybe that is my key: “There a lot of questions that go into salary determination, incl. HOURS WORKED, responsibilities, employees overseen, etc. Just like a normal job.”
So, if I just pay myself by the hour, even if it’s a high hourly salary, as should be for the owner of a company, it would be very little considering I only really put in time in the beginning. Hmmm. Good call. Thank you. And yes, I NEED to get on top of the IRS ball!!!!! More importantly, I need to get to work putting this great idea I have into action. I decided to do that and quit letting the little life issues get into the way. I even ordered my business cards yesterday in order to begin my “plan” as I had set out in the beginning. Wish me luck!
Hi, would it be possible to get recommendations on software (bookkeeping, etc.) that is ideal for s-corp’s? This business is and will be run only by myself and I want to make certain I cover all my bases throughout the year so that I’m not scrambling and stressed over a lot of what’s mentioned above.
Thanks – Ashley
Hi All… After MUCH frustration I finally broke down and bought TurboTax for business on Sunday. Monday night I finished my corporate taxes just in time to e-file. WHEW! I will be buying TurboTax every year. It made it MUCH simpler.
I have a question: I am planning to open a small business this summer and am expecting a loss this year due to the costs involved with getting started, and not having many clients intially. I will be the only official employee but my husband will be a 50% partner and will help with the marketing. We have significant other income to offset (from a severance package – yup, the economy hit us and we have decided to take matters into our own hands!) Anyhow, I am wondering if the best way to take advantage of losses would be to start out as an LLC (so do not have to pay salary) and then switch to S-Corp at a later time when we have profits. What do you think?
Also – unrelated question: We could be spending up to $75,000 in consulting fees for help with opening this business. I know that we can only deduct $5,000 for start-up costs. If some of these consulting fees are not incurred until a couple months after the business opens, can we then deduct more than the $5,000? This is an important issue for us, as we expect to be in a high tax bracket this year (low tax bracket next year, due to business start-up.)
Thanks so much for your advice! – Danielle
I am a sole proprietor and want to go LLC or S corp. After reading this whole page I still don’t know whether to go LLC and file as S-corp or just go S-corp. I have income of about 70K.
I filed to incorporate and received my incorporation papers on 12/3/08 – can I still run all of my 2008 income through my LLC/s-corp? Or only 1/12 of it – I have a financial advisor telling me one thing and the cpa telling me another – HELP! I hired THEM to be the experts, not me
So the S-corp pays unemployment taxes on the 25k of profit from the example?
My business partner and I are trying to decide the most appropriate business form S Corp or LLC. We are both employed full time W-2 employees for non owned Corporations. We are starting an insurance brokerage firm in our off hours. We are not intending to take any money from the business other than expense reimbursement for many years and will use the profits to make acquisitions such as other insurance agencies or blocks of business. It may take a year or two to accumulate funds in the business entity to make those purchases and we would like to be taxed as lightly on those funds from year to year. Due to our employment we are in a relatively high tax bracket (100K+) each year.
What would be best, or does it matter?
Hi Guys,
I just got a contract job (roughly 6 month duration) I want to set up an S Corp to hopefully save some money in taxes. Its a part time gig thats paying me 700.00 per week.
Now from what I have read, I would have to schedule a Salary out of this, plus, I could draw from some distributions.
I mean when I schedule a salary, how do I take into account this is only a 6 month project, and I may not have a need for the Corp after the project is over?
I guess I need someone to help me with a game plan.
SO, after all of this, I have an S corp (Filed in January of this year in Maryland) with a whopping $649 income (total, MUCH more in expenses) since we’re just getting started. We have filed with the IRS and received our EIN number (There are only two of us, myself and my partner) We have to file a form 1120 by 03/15/2010 according to the confirmation letter we received from the IRS. From what I gather, we do not have to file quarterly. Have I missed something here?
Thanks a million in advance.
-McDegga
I have an S corp and I wanted to know is it possible to be on Per diem if you are working away from your home office location and still can take advantage of all the write offs?
What a great forum! I have run an S-Corp for 3 years now and unfortunately the business ‘service’ is no longer there. 2008 was my first year with no activity in the S-Corp (also have a w-2). I plan to keep the S-Corp for future ventures (if I can do so). With that said, do I need to file any forms annually when I do my personal taxes to let the IRS know that I didn’t ‘forget’…that I simply had no activity(other than my annual report to the state)?
Much appreciation. Thank you Zack for your responses to those above – great info.
Travis –
Yes, you need to file a “Zero” report. This means you still file a tax return for your S-corp – just showing no activity.
You will still need to pay any State annual filing fees/ biennial reports, etc.
Quick question for all the tax experts! We are an LLC filing as an S-Corp. After my reasonable salary and all expenses, we have about $55k in ordinary business income. I’ve read all of the information above but just want one more confirmation. This $55k doesn’t have to be distributed to the single shareholder (me), nor do we pay any tax on it, right? It just gets carried over into the next year as a starting balance to be used for cashflow, correct?
Zeiner-
It doesn’t have to be distributed, but you get taxed on it through your K-1. And, no offense, your last sentence just does not make any sense.
Travis-
In this situation, consider shutting down the S-Corp to limit liability to those already completed projects, especially on the tax side. Many factors go into that calculation, though.
No offense taken – accounting lingo isn’t a strength. My phrasing and terminology is undoubtedly off, but I appreciate the help just the same.
Bare with me… in the table at the top of the page with Maria’s $60,000 profit vs her $35,000 Salary and $25,000 profit. Let’s say Maria had taken an additional $5,000 in shareholder distributions and left the remaining $20,000 in the company, would her K-1 be on the $5,000 or the full $25,000 profit?
I thought one of the benefits of the S-corp is that the money isn’t taxed until it comes out of the corporation. Why would the $20,000 be taxed if it hasn’t been disbursed or paid as a salary to an employee or shareholder? Once it is paid out in the following year, wouldn’t that money be taxed a second time?
Zeiner-
1) I really hope you took an extension. The 1120S was due March 15.
2) What table?
3) What you have is 35K salary and 25K profit. Don’t say 60K profit, you’ll confuse everyone, incl. yourself.
4) The 35K should be on a W-2 and taxed accordingly.
5) The 25K is taxed as income.
6) The 5K doesn’t matter. As long as there is positive equity (generally speaking) in the company, distributions are not taxed, deductible, etc.
7) The benefit of the S-Corp is that there is no SE tax on the profit.
8) The profit is taxed to Maria personally because it has to be taxed somewhere, either at the corporate level (see C-Corp) or personal level (ie, S-Corp or LLC, etc). You made the S election, so personal level.
9) Again, distributions aren’t taxed, so no “double taxation.”
This distribution/dividends and S-Corp taxation is something that trips up a lot of taxpayers. With that level of income, you need to see a pro to make sure you’re picking up all of your expenses, that the payroll is properly handled, and that the forms are properly, completely, and correctly filled out.
Thanks – that helps a lot. Yes – our accountant filed the extension. We’re just trying to wade through this on our own to see if it is something we can handle. Seems well worth the fee to get a professional to handle.
thanks again – you’re a gem!
zack, how can I contact you ? im looking for a cpa and consulting.
I get confused. In NC i was in trouble for tring to pay unemployment of myself, and later collect when i needed it. In florida they are on my ass about unemployment taxes.I have no employees. I am a sole proproiter or a s corp. what the deal?
Hi, CPA and experienced LLC owners.
I have a question on per diem. I travel extensively on IT job. I would like to use per diem for the whole travel (not just meals). Right now I am one member LLC. I just wonder whether I need to elect to be taxed as S-corp.
Is it true that you cannot use per diem if you own more than 10% of your company ? As said in
http://www.businessmanagementdaily.com/articles/11823/1/Can-S-corp-owners-use-the-per-diem-method/Page1.html
What if I don’t elect to be S-corp ?
Then LLC owner, much as a sole proprietorship, should be able to use per diem. Right ?
Thanks for your insights.
Hans
Regarding per diem for a sole proprietor: you can only use government per diem rates for meals when traveling. The meal per diem rates vary by city. You cannot use per diem for hotels. This may not seem fair, but it’s the breaks. Keep track of your hotel bills!
Thanks, Danielle.
Is there a document or IRS pub (page number ???) seconding what you stated. Is there any way for LLC solo or LLC taxed as S-corp, to use per diem for more than just meals, I mean for the trip including hotel, car rental, etc. ?
Who is eligible for the Max Per Diem Rate published at
http://www.gsa.gov/Portal/gsa/ep/contentView.do?queryYear=2009&contentType=GSA_BASIC&contentId=17943&queryState=Virginia&noc=T
?
I appreciate your insights.
Hans
I am going in to business with 2 other persons. What would be the best for us to file LLC or S-Corp we are buying into a franchise?
I wanted to know if it is best to have w-2’s for us being employees or do 1099’s? What would be the better savings for us in paying taxes?
We will be utitilizing a CPA so we will have a cost there either way.
I want to give the government what is owed to them but is which way is better for the company money savings if any?
I’m part of an S-corp of 3 and have 50% share. I am the only payed employee. We are having hard times right now and i’m wondering if we can lay myself off and draw unemployment.
I’m part of an S-corp of 3 and have 50% share. I am the only payed employee. We are having hard times right now and i’m wondering if we can lay myself off and draw unemployment.
Zack I have a question re: your answer to Zeiner on this point:
5) The 25K is taxed as income.
In reading from the example on the site about “Maria” I thought that if her S corp issues a distribution, the S corp won’ t pay taxes on it. The S corp will however, have to pay social security and medicare taxes on the amount of salary it’s paid to Maria and it will have to pay taxes on her salary at the state level (or, unemployment taxes).
Do you mean that when Maria gets the 25K, she will have to report it on her 1040, and that accordingly it will be taxed?
Just want to make sure I’m clear.
Thanks
Onlooker-
Sounds like you’re right. S-Corps pay payroll taxes (SS/MC, state unemployment, fed unemployment, etc). But no income taxes. S-Corps do not pay income taxes, so the profits are taxed to you personally (ie, on your 1040). It is then taxed for income taxes at the personal level, in addition to your W-2 from the S-Corp.
I have heard varying things about being able to file taxes as an S-Corporation even thought you are technically an LLC. Is this true? If so, would I really see the same tax benefit of not having to FICA on anything besides payroll?
Thanks
I just bought a territory for a franchise (senior in home non-medical care – odd jobs, companionship, light care/cleaning/cook, driving). Most of the franchise owners have seemed to setup their business as an LLC. only few as S-Corp.
My wife and I signed for the franchise territory (10 years) as 50-50%. I’ve heard varying opinions on whether I should setup as an LLC or S-Corp, and whether to only have myself on the company, or to split with my wife. We want the simplest and most cost-effective (taxwise especially) setup for the business.
If I am the only one listed as owner for such an LLC, can I take something like a “owners draw” and then not have to pay the 15.4%? (as opposed to taking a payroll (employee) monthly?
Thanks
fyi: the employees we will hire will all be “independent contractors”, so no official payroll.
As long as you don’t live in California, LLC is the more flexible way to go. Generally an LLC can file as either a partership or as an S-Corp. The rules on LLC do change based on the state you live in, so you should check on it. Since you signed the franchise as 50-50 owners, the default method would be to operate the LLC as a partership, with each of you getting a K-1 with 50% of the income. You will have to pay self-employment taxes on the entire amount of income, unless you elect S-Corp status when you file your taxes. If you elect S-Corp, you will need to pay yourself a “reasonable” salary based on the type of busines you are in. If your wife contributes to the business, she would need to be paid a salary as well. The IRS takes a good look at S-Corps and salaries so make sure you don’t underpay yourself.
DMR-
Danielle’s pretty much right, but you also want to look at the LLC 50/50 and making your wife or yourself a passive owner. That means no self employment tax on that person’s share. There are some technicalities to this, so I recommend a pro to CYA and argue on your behalf should something come up. You would also have to weigh the value of that vs. just a sch C and being done with it. With a 50/50 LLC you’ll have to file the Form 1065, which is just a PITA for a lot of people in your situation.
As for the owner’s draws, it’s just money you take out of the LLC; it has ZERO impact on the profit and the associated taxes you would pay (ie, it’s not an expense and does not reduce your profit).
Is there a break even point? What does it costs to hiring the tax/accounting professional? If it costs a $1000 and I’m saving $1000, net $0, I won’t do it because of the extra hassles. For a programmer in NJ, billing $100000, commuting 80 miles daily, paying tolls, having to buy medical insurance for his family, working at a client site, and employing his wife to visit the tax/accounting professional, is it a modest win or a big win?
Bill-
For $100k, it might not be worth it. There are a lot of hassles, and unless you’re showing BIG profit (ie, being very conservative with what expenses you take, the pain in the butt just isn’t worth it. I also don’t recommend “hiring your wife” (you’d really have to “hire” her?!?). I think your situation would depend on how aggressive you want to be on your taxes. Ask someone for the initial consult, it’s typically free or at least the first hour is. Even if it costs a little bit, it’s deductible and at least you’ll know.
CPA rates vary wildly from location to location and with level of expertise/experience/frills. You’ll have to call and ask.
Greetings everyone,
I am currently employed full time (w-2) and I want to start a small transportation business. The business will be under my name but my husband will take part in operating it along with me. Which structure is best to use, (LLC or S-Corp)? We are leaning towards the S-Corp but need some clarification as far as which one has the best tax advantage.
“Zack Says:
June 21st, 2009 at 3:07 pm
Onlooker-
Sounds like you’re right. S-Corps pay payroll taxes (SS/MC, state unemployment, fed unemployment, etc). But no income taxes. S-Corps do not pay income taxes, so the profits are taxed to you personally (ie, on your 1040). It is then taxed for income taxes at the personal level, in addition to your W-2 from the S-Corp.”
Im confused. If the S corp doesn’t distribute the funds, is it safe to say that there is no tax on the fund’s remaining in the s corp? If that is the case, could the fund’s be distributed in another fishion? Say to an llc that owns the office building. Never mind the fact the owner A of the S-Corp is the same Owner A of the LLC property managment?
Lastly, When filing quarterly for S-Corp, do I use the same 1120-W that C-Corps are required to use?
If these anwers are very long and drawn out, please feel free to direct me to a web site or book for further reference. FYI, planning on forming S-Corp first quarter next year. Tryin to dot and cross is all.
Thanks
Matt
Denise,
Some of the things that i have learned through my research:
S Corps are best if you will have employee’s. LLC’s are best if you will be owning property, obviously due to the laxation ability of LLC’s to ‘act’ like sole proprieterships. There are a bunch of different web sites that have great comparisons
S-Corps are passthrough entities, so all income is still taxed even if not distributed.
Matt-
The income from an S-Corp is taxed on your personal tax return, REGARDLESS if the money stays in the company or not, just like Jonathan said.
I also can’t think of anything that substantiates the LLC v. S-Corp with regards to the employees and property. All gains, losses, and depreciation flow through the same way with S-Corps and LLCs.
Yes, you could wipe out the profit from an S-Corp by leasing to an LLC that you own, but there are rubs. Namely, to withstand IRS audit, it must be an “arm length’s” transaction, which basically means that the rent is reasonable and was executed using standard business practices. Also, the LLC that owns that office building must then pick up the income, which flows back to (guess who!) the owner (who also owns the S-Corp). This means that you’ve just wasted your accountant’s and your time. I would think that the LLC might be useful if you have multiple offices available for rent in the building.
S-Corps are not required to file anything quarterly since they pay no tax (except payroll taxes…different discussion). Also, the 1120W is not required, just recommended to compute income tax liability. S-Corps file an 1120S.
In summation, drop the $1,000, hire a CPA, get some good advice, protect yourself from the IRS, save your time, and save some money on taxes while you’re at it.
-Zack
if you are w-2 already and make > 105k you dont pay the 14.2% to SS on any s-corp/llc earnings. just the taxes on income after all expenses, and huge retirement contributions! like 40k + if u earn enough on the side
it’s easy
LLC taxed as S-Corp way to go! feel sorry for CA people who have to pay 800 / yr for the llc though
LLC’s in NYC (and maybe others) isn’t subject to Corporation taxes, an S Corporation in NYC is treated as a C Corporation and is taxes at the Corporation level (double taxed).
Think about it it might not be as simple as a LLC is the better way to go.
zack,
Thank you very much for your insight and patience. I will continue to read as much as i can until the day comes that a CPA is a must. Do you have any recomendations for reading on this subject matter?
Matt
Matt-
The best thing to read is the IRS publications followed by academic textbooks. Stop reading stuff on the web that’s not official (like this). I’ve seen the craziest stuff on the net.
-Zack
I have been considering an LLC with s-corp election. I have a few questions.
1) How many dividend payments can be made a year? (can they be monthly, etc? I know some corps pay monthly dividends.)
2) How should I determine salary? For what I do the salary range is from 40-80k. I’d obviously like to be closer to the lower-end of that spectrum for the SE tax savings.
3) Would there be a benefit to have my wife as a member as well, or does it even matter?
We have a 3-person S Corporation. One partner is leaving the corporation. We are buying her out for $6000. I know I report this as income to her on a 1099 and she will pay capital gains, but how do I report this expense to the two of us shareholders left on our books and on our 1120S? How does this affect our basis going forward? Thanks for your help.
Thank you for all the above information and conversations, they have really helped. I have a situation that I’d like to get some opinion on:
New business (2 employees and one other “investor) purchased a retail business in the beginning of Oct. We each paid 1/3 price of the purchase and own 33.3% each. We setup as an LLC and now I’m trying to decide if we should elect to be taxed as S corp. FACTS:
– 2 of us work for the company and get paid $x/hr for management and billed hours. We assumed it would have to be guaranteed payments (no tax withheld/must pay se tax). Our business was turn-key and will show a profit beginning this first year. (We are lucky, I know!)
– The 3rd “member” is a full time employee in a different business earning over 200k/year (not worried about SE tax as much since he’s maxxed out the ss earnings already).
– The “paperwork” required for employment taxes is what I do for a living outside this business, so that is seamless for me.
– We are located in ND (don’t have any special state rules for s-corp or llc’s except that we have “governors”, which is just terminology from my understanding).
My questions are:
1) Is it a no-brainer to apply to be taxed as an s-corp?
2) Is there ?’s I’m not asking or considering?
3) Assuming we go forward with llc being taxed as a s-corp, how can i handle expenses that we have in our operating agreement as NOT being reimbursed to any members? I have a business lunch or mileage…(I do already file a schd C for my bkkpng/tax work) but wouldn’t have a place to deduct this new business expenses (because I won’t have SE income from it???
THANKS for ANY advice you can send my way…
Jennifer
I am starting a small business as a single owner and wanted to form an LLC and elect to be taxed as an S Corp. My reasoning is that I only have to do the one filing on my reasonable salary and pay the SE tax on that instead of the quarterly payroll that an S Corp has to file and worry about the paperwork. As a single owner I have to pay both portions of payroll tax anyway. Is my understanding on the matter of LLC as S Corp on payroll and the single filing correct?
I am trying to remove myself completely from a company I co-founded. I own 50% of the stock and I want to just get rid of all of my stock in the most efficient way possible. What would you recommend the best way to go about this?
Thanks in advance for the advice!
Mike
After reviewing tax and income advantages of an LLC versus an S corp we opted for the LLC. Based primarily on the fact that the first year (or two) would be an absolute loss to the tune of 100’s of thousands we opted for an LLC. As we become profitable next year we will most likely flip to an S Corp.
1.) It seems that all the comments here center on INCOME advantages – what about LOSS advantages? LLC over S Corp?
Research and Experimental costs are deductible (or amortizable over 10 years). Most of our labor (partner and I) this year was focused on R&E – again to the tune of 100’s of thousands.
Several questions now as we proceed into the second year:
1.) Is it better to deduct the R&E lump sum up front as it occured? will this cause a massive AUDIT flag?
2.) IF we choose to amortize, what is the mechanism to track the 10 year amortization?
3.) We WILL accrue more R&E expenses next year as we proceed, does this become another “chunk” of R&E expense accumulated over the year or can it be expensed in quarterly increments?
I have formed an S-corp that was incorporated the first day of last year. I am the sole owner and sole employee. I had the intention of placing some bids on government contracts for construction. That never came to fruition and I instead decided to start a website (which I am paying someone to create and is not yet finished total cost in 2009- $1200).
The S-corp has not earned any income and I never paid myself a salary as the only work that I have done is hire the company to build the website in the fourth quarter. Should I have started an LLC? I believe that I have to pay about 800 for the right to do business in NY for 2009. What should I do about not paying myself a salary?
I expect business to really pick up in the coming months. Any suggestions?
Thanks
I haven’t read all the way down the page through the comments yet, but I have a question too…. hoping if it hasn’t already been answered that someone can answer it for me!
Business and tax things confuse me to death. I do the best I can…
Anyway. I live in California, but I started a New Mexico LLC, because it was cheaper, and I was told your privacy is more protected. Anywho… what do I do with this?? My main form of income is from Adsense, and Im working on another website as well. I just want a solution that protects me and saves me money on taxes. I also intend to do some freelance work, and have that go through the LLC if it becomes profitable… What I’d like to do is just pay myself from the LLC account whenever I need money, use the LLC to buy business related things, NOT spend a ton of time and money on confusing paperwork, etc… and obviously, save taxes. This self-employment tax is killing me! I couldn’t even pay last year and I’m still paying it off and dealing with the IRS levying my account… Nightmare. I don’t know how I will do this in April. Anyway. I want to get this sorted out so I’m prepared for 2010! Should I keep it a sole proprietorship or S corp…? I’ve been researching but not coming to any conclusions. Also… my new accountant is confusing me even more, by saying something about still having to pay the $800 in California?? no way! I was also told the LLC wouldn’t have to file any tax paperwork, but she’s saying yes?? Please help me…. thanks 🙂
I, too have a question I own an s-corp. We paid back ~ 200,000 in loans over the course of this past year, ended the year with 15k in the bank, but is the net profit going to be $215,000? How are loans treated? Do they pass through as profit to the owners to be claimed on the K1?
Hi Zach!
I worked as a sole prop. with an EIN for 6 years.
I started my LLC in July 2009 (in NC). It is Feb 20, 2009.
Only one of my clients did I give my LLC EIN # and made $9k
in 2009 from them. The rest I still had them use my old EIN
until now (2010).
I’m not sure whether to file the late 8832 now — or can I wait
until AFTER I’ve done my 2009 taxes and elect to be taxed
as an S-Corp for my 2010 taxes?
My CPA says once I file a schedule C for my LLC EIN, I cannot
go back and be an S-Corp? Is that true?
Thanks-
Matt
So if my s-corp has not had any income (real estate) for the past year…nothing financial has changed…my license was on frozen and didn’t have any expenses because this is a second job I did no work on last year, do I need to file taxes that show 0? I plan on doing business again this year but actually did no business for 2 years.
Whitney, I’m not sure why you chose to set up a foreign LLC (any LLC not in your home state where you are doing business) given your business is just making adsense money. When you register in CA your identity will be known unless you jump through more hoops like have one company own another and use registered agents.
Your accountant is right and you need to register any company doing business in CA. That means you should have registered your New Mexico LLC in CA as a foreign (foreign to the state of CA) LLC. Not registering the LLC and doing business (including paying an employee/you or running your adsense business) could open you up to fines in CA including the $800 annual fee plus interest. Not paying taxes in CA while you are working in CA could have you in trouble with the fed/irs and state. Could you get away with this, maybe. But CA is cracking down on people avoiding taxes and fees because the state is hurting for money.
Foreign companies can be a nightmare and only useful if you are making enough money to pay the fees and need to hide your identity. You’ll never hide from paying taxes. The best you can do is cut out SE taxes but start paying SS & Medicare taxes. In any case you are the only employee, you are located in CA, no other employee is located in NM, no business is being conducted in NM so you are doing all your business in CA and you need to pay taxes in CA plus register the LLC in CA.
As for the many other questions I recommend you talk to a good corporate attorney who specializes in tax/accounting issues. You have a lot more problems than just whether you need to register the LLC in CA and pay $800. You are seeking ways to cut SE tax and haven’t run your LLC properly (paying taxes, filing papers). You really need to speak to a corp attorney before making any changes as you are high on any audit list since you are already being levied for back taxes.
Pam, you have an s-corp. You must file taxes with the fed and state. Even in years where you make no money. If you haven’t filed taxes in past years as an s-corp you will want to look into an amnesty program so you won’t have to pay penalties on failing to file taxes. Nothing is worse than paying penalties when you made no money. Depending on your state you may need to file quarterly and annual corp minutes to keep your s-corp in good standing. Depending on the state and setup of the s-corp you may be responsible for paying quarterly taxes or estimated taxes. You will want to find this out as penalties could be levied if you are skipping these taxes. Even zero balance scorps need to file the proper paperwork that shows a zero balance. Most states will mail the corp and let them know they are missing those filings.
You may want to talk to a corp tax attorney to make sure you are handling the proper state corporation commission filings along with proper state & federal tax filings.
For some people a s-corp is more work than they can handle alone. People that don’t stay current on their responsibilities can find themselves with more headaches and fees than if they just closed the business. A good attorney can help you through getting your scorp current.
Well all that just makes me feel even more depressed, really. I can’t afford an attorney. I got it at keepyourassets.net and asked so many questions I thought I had it all figured out. but apparently not. it was so expensive to start one in CA and I wanted to avoid the $800 a year, and they said I wouldn’t have to pay it with a NM corp. I’m just sick of this whole tax situation. I feel like I’m being robbed blind. I don’t intend on getting social security, and yet I have to pay in. I’m punished because I want to work for myself. And it’s an obstacle course just to hang on to as many dollars as I can. I don’t know what to do.
Whitney-
Since you’re in a bind, skip Tim’s suggestions with the attorneys. Ideally, everyone would have an attorney setup and dissolve businesses, but welcome to reality. Since you can’t afford either the $800 LLC tax or attorneys, I’ll assume you can’t handle the S Corp required filings. What I recommend is closing the NM LLC ASAP. Include all the income for the year on a sole proprietorship. Taxation treatment will be the same. File a Sch C on your personal return labeling the LLC as final with zeroes across the board. LLCs are not a requirement to be in business. (Note: I’m not very familiar with CA taxation, so there might even be extra taxes on a SP similar to the LLC tax. So see a local pro.)
The SE tax really shouldn’t be that bad if you’ve saved money through the year, and if you’re even moderately aggressive on deductions.
Matt-
What your accountant says about not being able to elect S Corp after the Sch C doesn’t ring true, but hey, I’m not doing your taxes. I will add that I would only do a corp election with a “clean” LLC. Meaning form the LLC and immediately change it into an S, C, whatever. So basically the same thing your accountant said…
Misty-
Not everything is 100% deductible. So if you spent $10,000 on meals, only $5,000 would be deductible.
LLC_to_SCorp-
You REALLY need to talk to someone. I would have again gone with the S Corp due to the size you’re talking here. If you’re draining 100s of thousands of dollars on research, you really should drop some on an accountant who would shed some light on the loans to the S Corp basis issue you would have had. Considering the dollar amount you’re talking here, I’d have to do research and long discussions with you over long term plans, etc just to even chose the business form. You’re also confusing AMT and normal. For R&E, normal amortizes over 60 months, AMT 120.
EVERYONE-
Go see a pro. The few hundred or whatever bucks will be well worth it. Some of the questions on here are frightening (like what LLC_to_SCorp is asking…). Some of you are really opening up Pandora’s Box in search of tax savings but refuse to actually drop a few hundred on people who will help immensely.
I keep seeing people here talk about how much you save as an S Corp, which I happen to be. But I’m not sure the tax savings are really there as described on this pg. I think Zack seems like a good authority on the subject and I picked this example out of his posts:
What you’re missing in this whole discussion is FICA/SE tax. This is where S-Corps and LLCs really differ in a VERY significant way. Reread this article. Say the LLC had made 100,000 (No GP since they would be a wash) and S-Corp made 100,000 (before owner’s salary). Reasonable salary is 35,000. You pay FICA on that. Then you only pay income tax on the remaining 65,000. Whereas on the LLC you would pay SE (ie, FICA) on 100,000. So you would save 65,000 x 15.3% = $9,945 (roughly speaking, naturally). If you can handle the additional overhead on accounting fees, the S-Corp is usually worth it.
But here’s my question:
I don’t see the big tax saving here. You say S corp saves the 15.3% they’d pay in self-emp tax on 100% of income as a sole p or llc, but as S corp now that left over (not as salary) income flows to 1040 and you will have to pay in the tax bracket, which is normally going to be at least 15%, if you make more than 33K, you are knocked up to 25%. Looks to me like you could potentially be paying more in taxes via S Corp unless I’m missing something? If the 15.3% Self-employment tax is the only tax paid on 100% of income for sole p or llc, then it’s no savings really or is the total amount taxed again via whatever tax bracket it’s in? Thanks!
Susan-
LLCs and SPs pay the SE tax AND income tax. So in the example above, your tax savings come from not paying SE tax on $65,000. Roughly $9,000 savings on taxes (it gets a little messy because you can deduct 1/2 of the SE tax for income taxes, but you get the gist).
Thank you very much Zack for your quick response! That makes sense. I got confused bc something I read presented the SE tax as though it was the only tax you paid on SP income, and I’ve never done a schedule C return, but know there is all kinds of false info floating around. I did know about being able to deduct 1/2…another reason I wasn’t sure I was really saving being an S Corp. Very glad to hear that I am, makes all the paperwork a little less painful. I started in 2007 and have managed to do the taxes myself with professional guidance, but as I learned and compared different entities and how they’re taxed, it began to seem as though there really wasn’t a ton of difference in the end and was doubting my decision to incorporate so early (the day I started the biz). Thanks for straightening me out and really appreciate the reply at this busy time of year for you.
I have an s-corp that is not making any money, well maybe $3000 by the end of the year which will be sucked up by bank fee’s and stuff like that ( but I like to keep my s-corp ). I pay a payroll company for basically doing nothing. do I really have to do payroll with such a low income? can I do it myself? I don’t even take any distribution, it all goes for expenses. I am paying the $800 for CA. filing 1120s and 100S. can I do the payroll myself too? which form if I pay $0 to myself when I have no money in the bank? or can I just ignore EDD. what if I have no W-2 at the end of the year? ( I do this as my second job) BTW I love this Blog, very informative. thanks
Fran-
The only responsible thing I can tell you as a CPA is to close the S-Corp and run everything through as a sole proprietor. I know you said you want to keep it, but it appears to have no purpose besides generating audit and penalty risk for you. You can do payroll yourself, but it sounds like you’re in over your head already.
Ok so I am 1099. I work for an Oil and Gas Company and I am in the office 9 to 5 (I don’t know how they 1099 us) but if I get them to pay me through an S Corp, I will save about 10% to 15% in taxes? I didn’t for 2009 and am getting hammered right now. Another guy in the office said his tax guy is setting him up with one. Obviously I will be profitable b/c it is my job. I get paid for going to work, but I am 1099. With what everybody says, It is the best way to not give Obama more money.
I have the option of getting a W-2 or 1099 for a short contract work in the middle east. I am currently unemployed and have started a single member LLC currently running at a loss with start-up expenses.
Should the income be made directly to the LLC under it’s EIN or should it be made to the owner under the SSN? Should LLC’s EIN be provided in the W-9 or the SSN?
Can single member LLC claim per diem foreign expenses against income received from contract work performed out of US by sole member? Or is that only allowed for direct W-2 and sole proprietor?
What is the maximum loss from SMLLC that can be offset against other earned (W-2) income?
Thanks.
Please help…I was unemployed for a time last year, and have now been “hired” as a consultant with a new company. They pay me a gross amount, no taxes taken out. What is the best option for me? I don’t plan to be in this circumstance long (hopefully) but want to somehow stay ahead of the tax man. Does becoming an LLC or S-Corp alleviate the quarterly estimated tax payments? Does 1 or the other reduce the taxes paid? Thank you for any assistance and guidance you can provide!
It will cost you close to $1000 or more to form the corporation or LLC and $350 or more to file a corporate return. State of California has a $800 minimum tax first year is waived for S-Corps but not for LLC’s. The only reason to set up a separate legal entity is to protect your assets and it sounds like you don’t need that. You are better off making the estimated payments. Google the safe harbor rule on IRS.GOV and follow those guidelines.
There is a lot of good information in this blog. I have a small business. I am the only owner, and I have no regular employees but occasionally I do hire someone as an assistant. The question that I have not figured out is:
1) What is the difference between an LLC that elects S-corp tax treatment and an S-corp?
* taxation ??
* paperwork requirements??
* FICA/SE tax issues ????
2) Also, my work has some seasonal lulls and if I am paying FUTA taxes can I receive unemployment during these lulls or during a prolonged illness where I can’t work?
Hi Zack,
Thanks for all your great posts. I listened to your advice and paid $850 to open s-corp in Orange County, Southern California. I wanted to make some side income and who knows it might become a huge success.
I noticed here many people keep their full-time jobs while they own s-corps. I just became one of them so your answer to my question will help many readers that will fall into “Full-time job + running s-corp business to save more taxes on additional income” category.
Is s-corp really the right choice? I’d like to get a second opinion from you.
Here is my situation.
I’m still going to keep my full time job while I run my s-corp.
I will make about $90,000 from my full-time job (filing jointly married with one child and my wife does not work so I’m currently in 25% tax bracket with exemptions/allowances; federal 3 and state 3), and I will generate approximately $30,000 from my s-corp. Profit will be about $20,000, but I heard that I have to pay myself a “reasonable salary” if I run s-corp. What kinda BS is that? Let’s say I pay myself $10,000 as reasonable salary then is that going to raise a flag to the IRS? Can you tell me approximately how much tax I will owe?
I know already earn enough from my full-time job to use up my 25% tax bracket so how can the profit of $30,000 and my salary of $10,000 from the s-corp help me? Will I end up paying more taxes at the end of the year on my W-2 because of the s-corp? How will the full-time income and the s-corp income be taxed in percentages?
Will I still pay 25% income tax on $90k full-time salary and 25% (personal tax again) on 20,000 profit made from s-corp?
Thanks in advance!!!
Hmmmm. I started the LLC because a friend and I are starting a website, and he suggested I protect myself in case for any reason people sue me…. the website is still not done but I’ve been using the LLC and it’s bank account for my other independent contracting business…. I don’t really want to close it and reopen it again when the website is finally done…. uggg. going to see an accountant today.
James-
Sounds like you have some serious misunderstandings about taxation. I’m sort of confused by your phrasing, as well. There’s no way I can give you an estimate about your tax situation. The profit from the S-Corp helps you because it’s profit…I’ll repeat my previous refrain: see a professional.
Having said that, I think the S-Corp was a poor decision. I would have gone Sole Proprietorship. Profits of $20,000, self employment tax, etc don’t justify the added significant problems of the S-Corp filings and payroll taxes. You just added about 14 returns to do every year that I can think of right now. All that to save on SE tax on 20 grand? Come on, read the article.
Sole proprietorship is the way to go for almost all side jobs besides your “straight” job. People think LLCs offer some level of magical legal protection. That’s almost never the case. Individuals almost always have to cosign stuff personally, and the LLC-veil is pretty easy to penetrate. And, in CA, the LLC tax is a deal breaker. And how in the world is it costing you guys so much to start these businesses? $850? Sweet Jesus…I can start an S-Corp in LA for about $100.
Also, did you actually file paperwork with the IRS to elect S-Corp or are you just saying you started a corporation?
For everyone who’s not willing to read this article:
1) SEE A PROFESSIONAL (CPA, ATTY, ETC). THIS WILL COST MONEY. BRING A CHECKBOOK.
2) IF CONFUSED, GO WITH SOLE PROPRIETORSHIP. IT WILL SPARE YOU THE WRATH OF TAX PAPERWORK.
Having said those two items, I’m not going to write in here anymore as I’m pretty sure I’m doing more harm than good. The internet is not a replacement for a professional in person.
If you have an LLC and elect S-Corp status for IRS purposes are you in danger of loosing your LLC if someone sues you personally since to the eyes of the IRS you are an S-Corp?
Does it mean that to the eyes of the law you become an S-Corp?
Is the lawyer more likely to get a lien on your LLC instead of a charging order?
Will the lawyer be more successful in convincing the judge to treat you as an S-Corp and liquidate your LLC and all assets that come with it?
Thanks in advance.
I haven’t read all the comments and replies, so this may already have been discussed: The state of Wisconsin and a few other states have what’s called a “statutory close corporation” (aka “closely held corporation”) whereby the S corporation is not required to hold annual meetings and is not required to have a board of directors. Also, the close corp need only have one officer — in my case (Vedatel Inc), myself as president. That simplifies the corporate structure and bookkeeping.
One other point to consider about the close corp or standard S corp in the state of Wisconsin (and possibly other states?) is, that the corporation can elect to exempt officers from paying unemployment insurance. However, the federales will require that the corporation pay double if the corporation pays no state UI. The upshot: at least you don’t have to remember to pay the state UI, a small but sometimes handy time saver.
I think I was waaay too premature in setting up a C corp for business still in planning phase on paper and just getting off the ground. So we reclassified to an S Corporation. No earnings yet… still very much in the development phase but we do have some basic expenses. Do we start filing quarterly now for expenses write-off claims if we don’t have reported income yet?
Hi Zack,
I set up S-corp(sole shareholder) this month. Since this is real estate investment company, I don’t think that I’m going to have any profit this year. I’m just wondering if I need to get W2 myself.
Thank you.
michelle, that’s a good question. you might ask the feds (IRS) what they think. it kind of depends on who you get on the phone, tho, so don’t expect a definitive answer. a few of the IRS personnel are very sharp, experienced, and helpful. the others just read from the manual and probably are trying to do something way beyond their capability levels.
think about this: your company exists. it’s real. as such, it has at least one officer, probably yourself, and that officer pretty much has to get some kind of salary, even if the company is nowhere near running a profit. how much should that salary be in those first lean months or years? in other words, what salary will the federales accept as legitimate? what will make the IRS happy? how much do they want to get from your company and your salaried officer in taxes (income tax, Medicare, Social Security) and unemployment insurance? how much does your state want in taxes and UI? if you get an answer, please post.
I have taxable investment account where i regularly trade stocks. Last 4 years including current i have made 5000, 2000, -1000 and 3000 till date profit. I have few questions is it advisable to form s-corp for my investment/stock trading activity. will it save tax? Do i need to transfer my investment account balance to S-corp account? I am working full time, fully funding 401k at work, fully fund Roth.
Iown a corporation with a net,net,net lease.I share this with 2 others our income is rent only. As of now we are calling our distributions a kind of quartly distribution and thats all.We file corporate tax returns and also pay an attorney out of the company, but the tenent is liable for all expenes while the lease is in force. Tax wise is this o.k to keep taking so called dividends throughout the year ?Will this sit well ith the I.R.S.?
Hello All,
My friends and I want to purchase a vacation property together and hopefully rent it out while we are not using it. I am questioning the idea of forming an LLC or starting an S-Corp. We probably will not show very much income, if at all. The rent would just be used to pay off our mortgage and cover costs. Would this even make sense to start an S Corp or LLC? For legal reasons and ease of transfering ownership?
I am currently working for a CPA firm and have 3/4 the testing done but do not deal much S corps or LLC’s so i am not familiar with many situations except what i learn in books. I am capable of doing tax returns and quarterly reports and any filings necessary.
And if there is a better way to own property with friends, please let me know.
Thanks
I am 3/4 a CPA with one more test to go but
Zack: Vijainand is right about avoiding S/E taxes, providing he bifurcates the interest in his LLC. Essentially he must set up 2 classes of ownership: investment, & membership units. The ownership in investment units is considered return on capital and hence not subject to S/E taxes. The membership portion would be. No need to make guaranteed payments. All the benefits of an S-Corp w/o the 1120S.
as a co-owner of a govt contracting company (S corp) I have questions about the companies tax responsibilities for per diem. Per diem is a passed through to the employee with no fees attached to our customer. Will the company have to pay taxes on the received per diem as corporate income, even though none of these monies are of any company profit or benefit?
If it a direct pass thru to the employees, it is taxable to them & they should get a 1099 from the payee.
I am so confused. I am opening up a single owner medical practice. I plan to get a lawyer and accountant. However, speaking with friends they are split as far as LLC vs S corp. I feel like I need to decide which corporation to go with even before choosing an accountant, so I can choose a pro LLC accountant or a pro s corp one.
1. If I am a single owner LLC, I can file as a S corp and avoid the SE tax? So is there benefit to being a s corp?
2. IF my practice pays for my malpractice, disability, student loans – do I count this as income for both LLC and S corp.
3. Do you get liability protection with an s -corp?
4. what is the advantage to an LLC in a very profitable senario?
by the way, your blogs are GREAT! What state do you work in?
Can you explain the cororate tax rate.
maria, my wife and i talked to a lawyer and an accountant here in wisconsin (green bay area). neither of them knew much about S corps. they recommended that we use an LLC. we didn’t take their advice, seeing as how they didn’t know what they were talking about.
we think we’re doing just fine as an s corp. the paper work is more complex but once you’ve got it set up it runs fairly smoothly. you have to file forms and make payments quarterly, and that’s a bit of a bother. but the extra work is worth it. we think there are advantages from a tax standpoint, although I can’t prove it. so if you can find information about tax rates and examples / benchmarks that compare S corps and LLCs, please post here and we’ll all enjoy dissecting it.
my advice to you: find an accountant who knows both: S corps and LLCs. get the skinny on both, but make darned sure the accountant isn’t biased from ignorance. then post your findings here. we’d all like to see what you get.
— TT
As a CPA who works mainly with S-Corps and LLCs I can tell you that the requirements for LLCS vary by state. In some states it is very expensive to set up an LLC and there are additional taxes imposed. Here in the state of Indiana LLCs are extremely inexpensive to set up and there is no additional tax assessed on LLCs. I have found that the most ideal structure for many businesses is to be an LLC with S-Corp status. That way you have the legal structure of the LLC which has less onerous requirements than an S-Corp, yet you get the tax advantages of the S-Corp. I do not recommend S-Corp for real estate companies or for professionals for various reasons. If you are an attorney or physician who makes over the social security limit there is not much savings on the self-employment taxes. There are, however, benefits to being a single member LLC (or partnership) such as the ability to deduct home office expenses, etc. Some states like California place heavy burdens on LLCs so they are not always the great deal that they are here.
I lost my job March 2010 and have been drawing unemployment since. I have three months of income for the first part of 2010 from the previous employer and also unemployment income. I have been working on trying to start up an online business. October 2010, I incorporated the business in order to be able to file taxes as an SCORP for 2010. I do not really have any income for the business only, expenses. My CPA is advising me not to file as an SCORP for 2010 because there is not any income. I still have nothing but expenses for 2010. So far nothing but expenses for 2011. I have read that an owner of an SCORP would write off on their individual tax return and losses from that of an SCORP. My question is “Do I need to file as an SCORP?” Why would I not want to file as an SCORP?
Question concerning S-Corps and Social Security earning limitations for people who are drawing Social Security prior to full retirement age. I know that the wages one gets from an S-Corp are counted against the $14,000+ that care be earning yearly before Social Security deducts $1 for every $2 earned. But is the Schedule K-1 distribute you receive as a shareholder in an S-Corp also count? I see on several IRS instruction sheets that “Your share of S corporation income is not self-employment income” and the Social Security Admin. says that wages as reported on W-2s and self-employment income count against the income cap.
I have been reading the comments for the last hour. My hat’s off to those of you taking the time out to answer the MANY questions everyone has. You guys and gals are great! Pardon me if I don’t get the jargon correct-I’m pretty ignorant when it comes to business and taxes.
I’m going to meet with a local CPA tomorrow, but am curious as to what what might be recommended here when compared to what my local guy will recommend tomorrow. I live in a very remote and small town in Michigan and don’t have access to a wide range of tax professionals.
My situation is this: I am starting up a small consultancy business. I’m the consultant and will make my wife and employee, or member depending on the potential tax break we can receive. I should gross between 150 and 200K/yr with slightly higher potential if business continues to improve, as it is now.
Business costs are minimal, roughly 3K/yr., after some initial computing purchases (roughly 5-7K-some already purchased). I’ve not had any business income yet this year, just some income from my previous job and I’ve cashed out some stocks to tide me over until the business is up and running. I’ve got between 100 and 130K in contracts already lined up for Q2-Q4.
The onus for setting up a particular business structure is almost purely for financial reasons-I am not looking for investors, will never have employees beyond myself and possibly my wife, will not need loans, or look for VC. The liability protection from an LLC or S-corp might be helpful though I am not sure I will have much protection since I will be the owner and 100% of the work performed by this business will be decisions I make as a consultant-nothing more, nothing less. I’ve not heard of anyone getting sued in my capacity, but it is remotely possible and frankly the loss of reputation and not being able to work in this highly specialized and small field would be worse than a lawsuit.
From what I’ve managed to decipher from the above article and comments, it looks like I would benefit from setting up an LLC with S-Corp status or an outright S-Corp. I’m not afraid of the extra paperwork of an S-Corp (though I am still pretty ignorant of what it might be), but am not not sure which would be more beneficial, financially. Any comments?
“Reasonable salary” is also a sticking point for me. I know what my peers make-the same rates as I do. How do I justify taking only a portion of that in salary, as opposed to a peer that doesn’t incorporate and takes the whole enchilada as salary? Comments on this would also be appreciated.
Finally, I also need to provide health and life insurance for myself and family and wonder how this is factored into the decision of an LLC with S-Corp status vs an S-Corp.
If it helps, I also hope to be able to sock away as much as legally possible from the business for retirement, possibly as much as 25-30K/yr…
Thanks in advance for any comments and I will post the recommendations from my local CPA, after we meet tomorrow.
Sure wish I had a degree in finance along with my geophysics-this stuff seems much more complicated than plate tectonics and Kirchhoff migration algorithms 🙁
Good questions. I don’t have answers, only more questions or comments.
First, the reasonable salary. I think you can work this to your advantage if you have an S corp rather than an LLC (with or without S corp status). The reason being, you can negotiate with the IRS and staties. Who’s to say what’s reasonable? Ask your accountant what people in your area get away with and try that. I know from experience that some IRS agents are reasonable, even creative and helpful (I kid you not), while others don’t know much more than I do (so sad) and hence go by the letter of the law, which can be very strict. It all depends on who you get on the phone and who’s assigned to your case if you’re audited.
Second, I wish someone in this forum would give a concrete example / scenario showing how an LLC would be better or worse than an S corp. All I’ve seen are opinions, no hardcore number crunching. There may be something about the S corp that is superior to the LLC, and if so, what exactly is it? How is the reasonable salary taxed as compared to the remaining income of the S corp? Is that better or worse than having it all shunted into the 1040 of an LLC owner? Can anyone provide the numbers in a concrete example? Please….
Third, can you pay into Social Security (including Medicare) as an LLC? If not, you might want to go the S corp route so you’ll be covered when you retire. Then again, depending on what comes out of Washington, Social Security and Medicare might not give you much benefit ten or twenty years down the road. It’s a real gamble.
ciao
The long and short of the results from meeting with a CPA and attorney are:
As an LLC is simpler to run than a true S-corp (less meeting and paperwork requirements), the best structure for me seems to be an LLC with S-corp designation for tax purposes. I’ll get the SE tax break on the pass through profits with less headaches.
I can purchase health care, pre-tax, including a HCSA. No issues funding an IRA, either.
“Reasonable” salaries for my wife and I are going to be based on the local economy, since my peers live all over the US and the world and some take the full profits as salary and some are doing what I am doing-setting up an LLC, or corporation, taking partial salary. As the local economy is extremely poor, I can claim a fairly small salary as “reasonable”, but still stand well above the median salary for this area. My CPA thinks this is the best argument I can have, given my situation and it shouldn’t raise any eyebrows at the IRS.
This still gives me decent savings on the SE tax, at a combined 70K salary, we save the ~15% on about 30K. Additionally, we both are still socking away a few Social Security credits for retirement (on our 70K), assuming there will be anything left in SS to pay out when we finally pack it in and retire.
Finally, in Michigan there are no real “State” issues for me. The Michigan Business Tax lower limit is 350K and I wont be reaching that any time soon, so I have only state income tax to worry about.
All in all, I’m happy with my CPA and Lawyer and would recommend surrounding yourself with professionals before you pull the trigger on any business venture!
Hi,
My partner and I are cotemplating starting a business. He is is a UK citizen and I am US. He agrees that the company should be a US company. Initially there won’t much of a profit from the company (at least not the first year). Given the multi-nationality of the owners, is there a preference among LLC, S-corp, and C-corporations to choose for the formation of the company?
Thanks in advance.
I am a realtor should I start an LLC or a S-Corp??
Look at Marc S from April 29th. LLC is almost always less hassle than S-Corp but also depends on state you live in – some have extra taxes for LLCs. Once you are making over $35k per year or so it is usually a good idea to get S-Corp filing status from IRS, but maintain yourself legally as LLC.
I don’t know about all states, only Wisconsin. So bear that in mind when I say that S corps are not as difficult to form and maintain as they may seem.
First, you don’t have to have a board of directors if you are the only member. However, I don’t know how many members there need to be before you are obligated to have a board, but I do know that I was allowed to elect the no-board option.
Second, my humble unprofitable company, Vedatel Inc, does not have an annual meeting. Same caveat as above: I don’t know the details right off the top of my head but i’ll look for them.
Third, filing an annual report is as easy as pie. There’s an online form that even a non-lawyer non-accountant non-MBA like my humble self can do. No problema.
Fourth, although there are a few accounts that you have to open up with the state of WI and the federales, once you’ve done it there’s not much to maintain except some easy quarterly and annual reports. The most difficult part is knowing where the accounts are, which fed or state agency is reponsible for them, where the websites are, and administrativia like that.
Fifth, I’ll look in my notes and post a more detailed list. I welcome comments. If you know an easier way, let’s hear about it, but please provide details. Vague statements about “hassles” and the like are entertaining but they don’t give us the details we need to make informed decisions, mano.
Sixth, have a nice day. (smiley face)
“I am not sure”…”I think”…”Wouldn’t it..?”..”I believe..”..Bap badda bap badda bap bap baaap.
A lot of talk and lots more speculation here but no one here seems capable of passing a test as business entities experts. No one can really provide a final decision on the distinction between LLCs and S-Corps. And what is a small business? $50,000 a year in revenue? $500,000, $5,000,000? If you can’t quantify it, you can’t qualify it. People, please, if you don’t really know, what compels you to attempt to discuss and explain?
Any experienced business lawyers/accountants here that can cut through the fog and know this stuff inside out?
My wife and I had a qualified joint venture and since we are making more money this year, decided it was time to form either an LLC or S-Corp. I consulted a CPA and she recommended we form a corporation and submit an S-Corp application rather than doing the same as an LLC. Her main reason was that with Congress looking at tax law changes, she feels that eliminating the S-Corp election from an LLC is more likely than removing that election option from a corporation.
She added that usually the tipping point for tax savings is if the company is going to make a profit of $35,000 or more. This is because of the added cost of tax preparation by a CPA firm for an S-Corp. (schedule K, etc) vs. schedule C.
An LLC and Corp., both with the S-Corp. election, will save taxpayers the same amount of money. Check with your state to see if there are differences in filing fees and annual reporting fees that may make one more beneficial than the other.
A benefit of a Corp. is that a Corp. can have shareholders, so if you are going to have several shareholders at the time incorporation or in the future, forming a Corp. would be the way to go.
The attorney who we hired to set up the Corp. said either an LLC or Corp. had the same benefits and said to go with the way we felt better. We formed a Corp. because if the company continues to grow we may want to bring in some new money and give those people shares of the company.
I am a professional, going into my second year of business. Last year I profited under $33k, with deductions, I got money back. This year I am tracking to profit around $50k. Is there a break point for when it is worth starting an S-Corp?
S corps can pay salaries to the owners, who earn social security credits from the taxes paid on the salaries. Can LLCs do likewise? If not, is this a point in favor of forming a business as an S corp rather than an LLC?
I’m new to this blog so please excuse me if this has already been answered. I am going to be contracted by a company to do some work and would be using a 1099. I want to know what would be more wise; to continue with the 1099, create an LLC with a single member, or create a corporation with a single member. The reason I want to use a “company” to get paid instead of a direct 1099 in order to save some tax money and also use the tax incentive benefits of a corporation. Any advice on what I should create in terms of LLC or C Corp or S Corp for single member/owner?
Miranda needs a new accountant.
I have a couple apartments that I have been acquiring over 2011 and am currently renting them.
At the moment I own them all under my name (not through an LLC or S-Corp). I have about 75,000 annually in rental income… probably around 25k after expenses (Taxes, utilities, mortgage interest).
Can anyone recommend whether I should go with the S-Corp or LLC to own the properties.
It seems from this discussion that the S-Corp would result in me paying less taxes, but i’ve read on other forums that for residential rental income LLCs are the way to go
i am a s corp small biz start up. my husband and i saved our money to start our biz. We put it in a checking acct and we lived on our saving the first sev mos while we were getting on our feet. the last sev mos we were paying back our loan, transferring 3k a mo from our biz acct to our pers acct to live on. but we just saw it as a loan repayment. we didnt think we had to pay payroll taxes to ourselves on money we paid that on when we earned it and saved it. but from what im reading, we DO have to. So, we just set up payroll with untuit quickbooks. do i start paying us NOW and keep the loan repayments as they are or do i have to pay us from day one that we actually quit our jobs or the day we first brought in money or when? what do you think?
I may have missed it but have not seen an answer about drawing unemployment in a seasonal business with an S Corp.
My wife and I started a very small company. We took $35,000 out of our 401K to start the business; we paid all this money for equipment to run the business. We are always in the red every month and DO NOT pays ourselves anything out of the business. At the end of every month we only have about $1,000 left in the business account. It is an LLC company, I am the President, and she is the Secretary Treasure. Since were in the red every month due to expense of running the business and the payment back for the loan from our 401K, and we don’t have any employee’s and are not going to make any profit for the next five years estimated, will we have to pay any tax’s you think or just file a tax form showing our PL? We pay the state 7.7% sales tax every three months, based on our taxable items, labor we do not have to pay tax on but in retial we have to pay tax on accessories we sold, etc. (usually around $300 every quarter, very little) The reason we keep the business running is simply because after we pay back our loan we loaned ourselves, we see we will be able to pay me a modest salary of $400 per week. It’s basically a business for me to play with as I am semi retired so to speak.
For a single member S corp or single member llc can you do anything in regards to repayment of student loans? As far as a deduction or no? Huge loans and if one allows it and the other doesnt easy answer for me.
I’ve just taken the last hour and a half to read this blog post and all the comments. Thank you Zach, Natalie, Monkey Mama, Justin and the other tax/accounting professionals I might have missed for your time and knowledge. It’s been helpful. Thank you also, Mark S. for sharing your CPA’s advice.
I fully agree with Zach: “For everyone who’s not willing to read this article:
1) SEE A PROFESSIONAL (CPA, ATTY, ETC). THIS WILL COST MONEY. BRING A CHECKBOOK.
2) IF CONFUSED, GO WITH SOLE PROPRIETORSHIP. IT WILL SPARE YOU THE WRATH OF TAX PAPERWORK.”
It’s just not fair to expect answers if you’re not willing to take the time to read the entire posting to see if your questions might have already been asked and answered.
My business associate who is a Senior Tax Advisor sent me this link along with a few other IRS links and related articles to aid my research on S Corps vs. LLCs. I run a payroll service for her and noticed 99% of her clients/business owners were S Corps and having been a sole proprietor for several years, I wanted to know why she was recommending S Corp to most of her clients. Now I have a good idea why.
Thanks for your input.
I am a sole proprietor, in California, who after decades of little income, have finally turned the corner and expect to earn significant dollars this year, which I’d like not to blow on accountants just yet. I work by the hour and have virtually no expenses, and have health insurance through my wife’s salaried job. I was under the impression that, as a corp, I could squirrel a lot more money away (than the 15%), pretax, for retirement but I am not reading anything to that effect here. Is that true only with a C corp?
I am also interested in liability protection, but what I am reading here is that, as either an S- Corp or an LLC, the protection is not real or, at best, it requires being very careful about not mixing personal and business activities, something I am not very good at!
Since my income will be way over the SSE limit (I know Medicare is unlimited, but that’s small), I can’t imagine I could pay myself such a low salary that the IRS would accept that I would save much that way.
If all this is true, it seems that I should just remain a sole proprietor. Can anyone help, please?
Correction: To my post above, I think the 15% number is 20%. Sorry!
Please let me know if I am getting this right:
A) An S Corp may make sense in cases where either
1) your reasonable salary would be pretty low (well below the ~$100k FICA max), or
2) your business income would be well over $175k (apx place where you max out a self-employed 401k), or
B) An LLC would be best when
1) expecting to lose money in the beginning (paying self-employment tax on an imputed salary while losing money would suck)
2) You fall into that fairly typical zone where your reasonable salary is over $100k so the only benefit of an scorp is a few percent for medicaid which is easily trumped by ability to defer taxes on apx 20% of the incremental income you would take as an LLC profit instead of an scorp net profit with a self-employed 401k
3) You work in a state that has some sort of corporate franchise tax that doesn’t apply to LLC’s (does this still exist?)
C) A Sole proprietorship is best when the numbers are small and you don’t have substantial assets or expected future earnings to protect from that slip and fall lawsuit.
So my question would be is it easy to covert an LLC into an scorp after years of operations? Let’s say year 1 is a loss, year 2 is $100k and then it goes up by $25k/year. So you hit $250k in year 8 and want to covert. You could pay yourself a salary of $175k and max out your retirement plan. You would then have $75k of net profit for an scorp that you would save ~3% medicaid taxes on for a bit over $2k. That should cover the extra accounting costs and if you expect your income to keep going up, will provide you with a net benefit of an scorp. I assume there are issues with trying to covert from an scorp to an LLC, but shouldn’t it be easy to go from an LLC to an Scorp?
Thanks!
My husband and I started a small cremation service in Jan 2011. We decided to start the company as an LLC. We have heard that a lot of funeral homes are LLC’s but file taxes as Scorps. I have researched and know about the forms to submit, but have a few unaswered questions:
1) What are the tax benefits? We don’t have much income to report from our first year.
2) If we choose to file as an Scorp, do we have to pull paychecks and file 941 during the year? Or is the election just for filing purposes?
I understand that if we pull a paycheck we will pay FICA and unemployment at that time, then also pay tax on the flow through income at the end of the year. How is that different from just paying on all flow through income? Just seems like more paperwork?
Thank you in advance for any help provided!!
Nicole
Zachary,
Know u are on busy season hope u can read my email and reply.
I formed a s corp in NJ, only myself the owner gets wage, hired a CPA, had a few questions upon the 1st quarter filing since founding the s corp.
1. On form 940(or 941), for social tax withholding, s corp pays more than twice of the social withheld from payroll, is it correct? My understanding is for social, employer and employee both pay same amount (4.2% of wage for 2012).
2. Does s corp need to contribute umemployment insurance(UI) for me, the owner and only employee? My pay stub shows there are UI deduction, does s corp only pass this amount to NJ or s corp should pay additional UI besides what is withheld from my wage?
Any NJ s corp filer here or any nJ tax expert, your comments are appreciated.
Zachary,
we started using an accounting service for the first time this year with our small remodeling/home repair business (usually just my husband and one or zero employees). we had been a sole prop, but they advised us to switch to S Corp. and I am wondering if we have the option of switching back due to the insane cost of their monthly bookkeeping and how complicated the s corp status makes things for us to take our accounting back in house. sole prop was very straightforward and we had an accountant do our taxes each year. now we have a book keeping service “managing” our salary and distributions and a tax accountant for year end, but I’d like to get rid of the 650/mth of the accounting service, but can’t for fear of really screwing up the S Corp details.
but if all the s corp does is make use more likely to get audited, have we made a mistake in moving to s corp status?
can someone close an s corp that just opened three months ago and return to using their old sole prop? or is that headache not worth it?
You can close an S-Corp, but you have to cancel the registration at the State level and also file a final Tax return with the IRS.
This all new to me. My wife is part of a small busniess (S-Corp) with 16 employees. She works in the office. Every year she brings home a K1 form for me to input into our joint income taxes. Each year i calculate our taxes without the k1 form. When I finally get it from the company accounant, i add the income and i lose a bunch of money for me return. I asked about the corportion income that is being reported on the form. Where has that money gone. My wife does not get any distribution. I was told that the money is put back into her basis. I was also told that in each paycheck throught the year, the corporation was paying the extra tax tht would acrue from the k1 income. Does this sound normal? Is my wife being ripped off?
Hi Tony,
It is plausible, the only surprising thing is that, you guys are a proud part-owners of a corporation and you do not know.
Incomes, deductions, taxes, etc of an S corp are passed through all their owners at the end of each year via a K1, even if distributions are not made. Each owner must then report such income, deductions, etc in their individual tax.
Your wife case, appear to be a ‘forced re-investment’ that is, her share of the redistribution is forced into her basis. See it as, the company cutting your wife a check for the distribution and she is doing a 180 and reinvesting the whole check back into the company.
Her basis with the company is her money, she can cash out anytime or sell her shares, etc.
Another tax advantage of increasing her basis is to enable her claim deduction should some future K1 result in a lost for the company….e.g. if your wife’s basis in the company is $1,000.00 this year…if she receives a K1 next year and the company made a lost of $1,500.00; you can only claim a max deduction of $1,000.00 in next year taxes against this lost, you have to carryover the remainder of the deduction.
S corp- service business with 2 mil in revs and 350k ebitda- now we have 6 shareholders- are we allowed to pay 3 key mgt salaries as expenses,, then see NOI and then a distribution on only 30% of ebitda? do we have to pay out all NOI or EBITDA??
doug 925 708 8988
thats a good example Jonathan, thanks for sharing. I have two questions 1. I heard that even on single person S-corp you need to pay Social and Medicare tax twice as an employer also as an employee on the salary you receive, is that true? 2) what amount of tax you’d pay on the remaining dividend you take?
I am an independent contractor, and have my business set up as an LLC. I gross $120K/yr. but my expenses are around $40K/year, which leaves my net income at around $80K. My tax preparer was able to get me down to $63K taxable income with deductions. I’ve read every post on this page. Great info! But the one question I have that I did not see a clear answer to is, what is a reasonable annual income to justify moving to an S-corp?
I have s corporation. NYS department of labor looked at my 3 years 1099. they told me I should have paid the workers as employee not as independent contractor. My corporation has no money in bank to pay the state, Can they go after my personal assets?
I am 70, drawing SS. I am still financially and physically fit to own a business and work full time.
I am an S-Corp. Do i still have to pay FICA from my own payroll when i am already drawing SS ?
thanks
what is the minimum the federal, state and local authorities require you to pay yourself? look into that, find out what’s “appropriate” for someone who performs the tasks you do. take out the FICA and other payments. what to do with the remaining capital? be creative. if you can find an accountant or tax lawyer who’s actually worked with clients who have S corporations, they can tell you in one hour how to do this.
I own a rental property under S Corp. Can a person hold a S corporation without having payroll in it. Since this S corp has a passive income to the owner personal tax . This S corp has only one person involve, which is the owner.
HI, we have LLC and run payroll on LLC EIN, but we started filing as SCorp with a new EIN that we got for our LLC. Do we have to change payroll from LLC EIIN to SCorp EIN or leave them as is ?
with $30,000 payroll salary / year to my self from the S corp how much distribution is normal to take / year as a only owner in the corporation?
HOW TO TAKE MONEY OUT OF S CORPORATION AND INVEST IT IN THE REAL ESTATE BY OPENING A NEW LLC?
?Hello,
I purchased a house back in 2008 as a owner occupied, and spend about $50,000 for remodeling on it same time. From 2011 I converted this house to a rental investment house and stared to collect rent on it until now. Since during the remodeling time I was a living in the house i never did deduction on my tax returns. Now after 8 years am i going to be able to deduct that 50,000 from my tax return or increase my depreciation deduction on my tax return?
Jonathan,
Did you pick the economy package with legalzoom?
I bought the standard package with corporate seal, binder to hold corporate documents, and stock certificates. You can get those made separately, but I decided to get it all together.
That’s a pretty neat trick!!
Husband and wife with an LLC recognized as a Sub S for taxes. If I make $18K and my husband makes $5k in the Sub S, both over 50, no other employees, how do I fill out a W2? Since the entire amount can go into our solo 401Ks is box 1 0 and box 3 and 5 the corresponding wages, $18 and $18K (and $5k and $5K) and then 12a indicates profit sharing? When do I need to pay then the SS and Medicare on the 940 and state? Each quarter or at end of year?
Thank you.
It’s been a while since I did payroll manually. If you are doing 100% salary deferral and 0% profit sharing, then you’ll have to still run payroll to document gross wages and to pay SS/medicare taxes. How often are you running payroll? I believe you have to file 940 at least quarterly, and if your income is high enough it might be more often.
So W2 box 1 would be a zero?
Boxes 3 and 5 would be $18K and $18K and $5K and $5K.
I would do quarterly 940.
Could the company max out, over age 50 contributions, with W2 and show an overall loss for shareholder distribution? We ended up paying ourselves more than we made?