7 ms·

How are you paying more in taxes for an LLC compared to an S Corp?

soaponarope 11y ago
In an LLC all income is passed through to the owner(s) personal tax returns. An S Corp will pay the officer(s) a reasonable salary and an excess capital is return to owners through a dividend which is taxed a lower rate than normal income. All gains by the LLC pass through as normal income.
- jazzyk 11y ago
  This is incorrect, at least for for an S Corp. The rest of the money (after you pay salaries AND deduct valid business expenses) is distributed to shareholder(s) as shareholder distributions using Schedule K-1, not dividend (terminology is important, they are not one and the same). Shareholder distributions then add (or subtract if you lost money) to/from shareholder individual incomes. It is taxed at the same level as other income.
  - zrail 11y ago
    One important point that people tend to ignore/forget: every dime of income after salaries and expenses counts as a distribution for tax purposes, even if the money stays in the company bank account. Shareholder/member distributions are not taxable events.
- hsitz 11y ago
  No, the non-salary income is not "qualified dividends" and does not qualify for the 15% rate. It is taxed as "ordinary income", just like the salary. The advantage of S-Corp taxes has nothing to do with lower tax rates. It has to do with fact that FICA and Medicare taxes are taken out only from the portion of income designated as "salary". So you effectively save about 15% (i.e., the rate of FICA/Medicare withholding) for income that is above your salary to point where FICA/Medicare is phased out (around $100k). Also others are correct in saying that an LLC can elect to be taxed as an S-Corp. S-Corp is a concept in the tax code, not a form of ownership itself. That is, if you create a corporation with the state, that corporation is just a "corporation", not an S-Corp or a C-Corp. Your corporation will be classified as an S-Corp or C-Corp depending on how you elect to file taxes with the IRS. It's similar with an LLC, which you create with the state, then can elect what tax treatment you will use with IRS: typically as sole proprietorship, partnership, or S-Corp.
delinka 11y ago
The S Corp pays you a "reasonable income" which gets taxed as income (withholdings, FICA, etc) and the remainder of the corporations profits that's passed on to the owner is taxed as capital gains (%15, IIRC). With an LLC, all profits fall through to your income and is taxed as such. Edit: revenue -> profit
- cullenking 11y ago
  This is incorrect, the profits are not taxed as capital gains, see my above post. Only time you get taxed on profits as capital gains is when you make the mistake and take distributions in excess of your basis in the company, basically a rookie mistake, and then you get taxed cap gains on the amount in excess, and it's a double tax :(
cullenking 11y ago
The other two replies are incorrect (I have up until this year run our business as an S-Corp). With an S-Corp, you pay your owners a reasonable salary. $50-70k is reasonable for our field according to our CPA. Any profits or losses from the business pass through to your personal income tax via a Schedule K1. The profits are taxed like normal income, they are not taxed as capital gains. The tax savings come from the fact that the distributions you draw from the profits of the company are not subject to FICA (medicare, social security). This saves you upwards of 13%. If you draw more than your profits for the year (say you run an accrual method of accounting, not cash, so you recognize revenue after services have been fully rendered, rather than when the cash comes in and you can have a large bank balance but no profit for that year), the excess is essentially double taxed with capital gains. A painful mistake, so track your AAA appropriately :)
- atria 11y ago
  Interesting. When I ran my S Corp, my goal was to avoid estimated tax payments. At the end of the year, the accountant would calculate the required taxes and I would issue a "net zero" check that only paid taxes, or a bonus check with a enormous withholding. The remainder was taken out as a dividend. Taxes paid via withholding are treated as if they are paid in through the course of the year which avoids estimated tax payment penalties.
  - cullenking 11y ago
    Yeah, I just do the quarterly estimated payments. If your business is constant (not growing) it's easy to handle via extra withholdings. If you are growing, they at least make it easy so that if you pay an estimated tax that matches the prior years tax owed (paid quarterly) you avoid any penalties, even if you have to make a lump payment to settle up the difference when you do your taxes at the end of the year. We have a pretty sophisticated business intelligence platform written in R that gets us estimated revenues within 10%, so I know how to budget through the year for taxes owed. I just pay my known quarterlies and keep enough in the bank to handle the remainder at year end.
- delinka 11y ago

In an LLC all income is passed through to the owner(s) personal tax returns. An S Corp will pay the officer(s) a reasonable salary and an excess capital is return to owners through a dividend which is taxed a lower rate than normal income. All gains by the LLC pass through as normal income.

jazzyk 11y ago
This is incorrect, at least for for an S Corp. The rest of the money (after you pay salaries AND deduct valid business expenses) is distributed to shareholder(s) as shareholder distributions using Schedule K-1, not dividend (terminology is important, they are not one and the same). Shareholder distributions then add (or subtract if you lost money) to/from shareholder individual incomes. It is taxed at the same level as other income.
- zrail 11y ago
  One important point that people tend to ignore/forget: every dime of income after salaries and expenses counts as a distribution for tax purposes, even if the money stays in the company bank account. Shareholder/member distributions are not taxable events.
hsitz 11y ago
No, the non-salary income is not "qualified dividends" and does not qualify for the 15% rate. It is taxed as "ordinary income", just like the salary. The advantage of S-Corp taxes has nothing to do with lower tax rates. It has to do with fact that FICA and Medicare taxes are taken out only from the portion of income designated as "salary". So you effectively save about 15% (i.e., the rate of FICA/Medicare withholding) for income that is above your salary to point where FICA/Medicare is phased out (around $100k). Also others are correct in saying that an LLC can elect to be taxed as an S-Corp. S-Corp is a concept in the tax code, not a form of ownership itself. That is, if you create a corporation with the state, that corporation is just a "corporation", not an S-Corp or a C-Corp. Your corporation will be classified as an S-Corp or C-Corp depending on how you elect to file taxes with the IRS. It's similar with an LLC, which you create with the state, then can elect what tax treatment you will use with IRS: typically as sole proprietorship, partnership, or S-Corp.

delinka 11y ago

The S Corp pays you a "reasonable income" which gets taxed as income (withholdings, FICA, etc) and the remainder of the corporations profits that's passed on to the owner is taxed as capital gains (%15, IIRC). With an LLC, all profits fall through to your income and is taxed as such. Edit: revenue -> profit

cullenking 11y ago
This is incorrect, the profits are not taxed as capital gains, see my above post. Only time you get taxed on profits as capital gains is when you make the mistake and take distributions in excess of your basis in the company, basically a rookie mistake, and then you get taxed cap gains on the amount in excess, and it's a double tax :(

cullenking 11y ago

The other two replies are incorrect (I have up until this year run our business as an S-Corp). With an S-Corp, you pay your owners a reasonable salary. $50-70k is reasonable for our field according to our CPA. Any profits or losses from the business pass through to your personal income tax via a Schedule K1. The profits are taxed like normal income, they are not taxed as capital gains. The tax savings come from the fact that the distributions you draw from the profits of the company are not subject to FICA (medicare, social security). This saves you upwards of 13%. If you draw more than your profits for the year (say you run an accrual method of accounting, not cash, so you recognize revenue after services have been fully rendered, rather than when the cash comes in and you can have a large bank balance but no profit for that year), the excess is essentially double taxed with capital gains. A painful mistake, so track your AAA appropriately :)

atria 11y ago
Interesting. When I ran my S Corp, my goal was to avoid estimated tax payments. At the end of the year, the accountant would calculate the required taxes and I would issue a "net zero" check that only paid taxes, or a bonus check with a enormous withholding. The remainder was taken out as a dividend. Taxes paid via withholding are treated as if they are paid in through the course of the year which avoids estimated tax payment penalties.
- cullenking 11y ago
  Yeah, I just do the quarterly estimated payments. If your business is constant (not growing) it's easy to handle via extra withholdings. If you are growing, they at least make it easy so that if you pay an estimated tax that matches the prior years tax owed (paid quarterly) you avoid any penalties, even if you have to make a lump payment to settle up the difference when you do your taxes at the end of the year. We have a pretty sophisticated business intelligence platform written in R that gets us estimated revenues within 10%, so I know how to budget through the year for taxes owed. I just pay my known quarterlies and keep enough in the bank to handle the remainder at year end.
delinka 11y ago