5 ms·

Subchapter S corporations or LLCs facilitate paying yourself distributions, which are exempt from Medicare and Social Security taxes, saving you an initial 15%.

Subchapter S corporations or LLCs facilitate paying yourself distributions, which are exempt from Medicare and Social Security taxes, saving you an initial 15%. Although, there are details and caveats to be aware of. I don't know of any way to get that benefit without a corporation.

sokoloff 5y ago
Social Security stops at something under $150K per year. If you’re going to try to avoid it by paying no salary and all distributions for work that you personally did, you’ll likely fall afoul of the “reasonable salary” test, designed to prevent exactly this.
- twodave 5y ago
  You don't avoid it all via the S-Corp. You just avoid the half the employer (in this case, also you) normally pays. I'm not a tax accountant or a lawyer, just happen to run my own consulting through an S-Corp. I still pay myself around half of the net revenue the S-Corp brings in as a regular employee, and that portion is taxed under FICA.
- mdorazio 5y ago
  Everyone needs to understand this. I’ve had two friends get audited and fined for massively underpaying themselves for contract work via their LLCs. Many of the people I run into who claim all kinds of benefits from this route are actually commiting low level tax fraud, knowingly or otherwise.
  - camgunz 5y ago
    100% this, get an accountant and maybe a lawyer. It is very, very worth it.
    - brianwawok 5y ago
      Many accountants make a living doing this. Many are also setup as s-corps taking low salary. You need to educate yourself and Understand the risks/rewards
nilsbunger 5y ago
You are right about that, and I probably should've mentioned it in my comment. But I feel it's a niche case for these reasons: 1) The benefit only applies to profits above "a reasonable salary". You need to determine and potentially later defend what you chose as a "reasonable salary". 2) Once you have over ~150K income (including your day job's salary and LLC profit), social security taxes phase out so most of the benefit is gone (just the medicare portion remains), unless you have a HUGE LLC profit. 3) There's overhead in filing taxes on an s-corp. All this probably makes sense if you have >$100K LLC profits and no other big income source, or maybe if you have >$500K LLC profits regardless. You'll def want an accountant. Companies like Collective.com exist to make it easier to go the s-corp route if you choose to go that way. But it is complicated for some minor savings.

sokoloff 5y ago

Social Security stops at something under $150K per year. If you’re going to try to avoid it by paying no salary and all distributions for work that you personally did, you’ll likely fall afoul of the “reasonable salary” test, designed to prevent exactly this.

twodave 5y ago
You don't avoid it all via the S-Corp. You just avoid the half the employer (in this case, also you) normally pays. I'm not a tax accountant or a lawyer, just happen to run my own consulting through an S-Corp. I still pay myself around half of the net revenue the S-Corp brings in as a regular employee, and that portion is taxed under FICA.
mdorazio 5y ago
Everyone needs to understand this. I’ve had two friends get audited and fined for massively underpaying themselves for contract work via their LLCs. Many of the people I run into who claim all kinds of benefits from this route are actually commiting low level tax fraud, knowingly or otherwise.
- camgunz 5y ago
  100% this, get an accountant and maybe a lawyer. It is very, very worth it.
  - brianwawok 5y ago
    Many accountants make a living doing this. Many are also setup as s-corps taking low salary. You need to educate yourself and Understand the risks/rewards

nilsbunger 5y ago

You are right about that, and I probably should've mentioned it in my comment. But I feel it's a niche case for these reasons: 1) The benefit only applies to profits above "a reasonable salary". You need to determine and potentially later defend what you chose as a "reasonable salary". 2) Once you have over ~150K income (including your day job's salary and LLC profit), social security taxes phase out so most of the benefit is gone (just the medicare portion remains), unless you have a HUGE LLC profit. 3) There's overhead in filing taxes on an s-corp. All this probably makes sense if you have >$100K LLC profits and no other big income source, or maybe if you have >$500K LLC profits regardless. You'll def want an accountant. Companies like Collective.com exist to make it easier to go the s-corp route if you choose to go that way. But it is complicated for some minor savings.