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R. Klein, EA
R. Klein, EA, Enrolled Agent
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Hello,This is a slight variation of the typical S-Corp vs LLC

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Hello,This is a slight variation of the typical S-Corp vs LLC question. I formed a LLC and wondering if I should file form 2553

I started a SMLLC last month. My income would be around $200K/year and my 'reasonable salary' would be easily around $120K if not more. So the social security tax would be same whether I file 2553 or not (since my salary would be above the minimum of $110K). So the only difference would be ~3% Medicare tax on the remaining $80K (~$2400). And do I need to pay FUTA and SUTA taxes even if I file 2553 (~$500-$600 in MD)? Am I missing any other government regulation/formality if I file 2553 that costs me money. Over all, in my situation, would you recommend filing 2553. I am sorry if this is more of a CPA question than a lawyer but this forum seems to have good answers - so thought I would ask.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to Just Answer!
Your assessments are absolutely correct.
From tax prospective - your expected savings with S-corporation is $80,000 * 2.9% = $2320
Yes - wages paid by S-corporation are subject of FUTA and SUTA taxes (even you will not be able to claim unemployment benefits).
You may add additional overhead for filing S-corporation and employment tax returns - and that also reduce possible savings.
Some additional benefits of having S-corporation is contributions to retirement plan -
for instance - with 401k plan you can put in an employee deferral plus the company contribution - so with $120,000 in wages you could put in an employee deferral up to $17,000 (for 2012) plus the company could put up to 25% of your wages with the total - up to $50,000.
You may consider employer's contribution only - up to $40,000 - and that contribution is not subject of FICA. If you do so - Simplified Employee Pension (SEP)might be a better choice.
See more information
- http://www.dol.gov/ebsa/publications/SEPPlans.html
- http://www.retirementplans.irs.gov/plan-comparison-table/
Customer: replied 2 years ago.
Thanks for your response Lev. But I just want to clarify.
(1)The question was not whether to form S-corp or not. I would remain a LLC but just file form 2553. Since the organization structure remains a LLC legally, do I still have to pay unemployment taxes for running payroll for myself ?
(2) And the other advantage of 401k, exists with just for filing 2553 or do I need to convert to S-corp for me to get hat benefit? Basically, from financial perpective, what are the differences between filing for S-corp versus filing 2553 with LLC. Am I making sense ?
(3) and I still have I pay regular income tax on the remaining 80k left over on paying myself 120k salary, right ?

Thanks for your response.
Expert:  Lev replied 2 years ago.
(1)The question was not whether to form S-corp or not. I would remain a LLC but just file form 2553. Since the organization structure remains a LLC legally, do I still have to pay unemployment taxes for running payroll for myself ?
The federal government does not recognize an LLC as a classification for federal tax purposes. The "single member" LLC is generally treated as a sole proprietorship unless you specifically choose differently.
The sole proprietorship doesn't pay unemployment taxes.

(2) And the other advantage of 401k, exists with just for filing 2553 or do I need to convert to S-corp for me to get hat benefit? Basically, from financial perspective, what are the differences between filing for S-corp versus filing 2553 with LLC. Am I making sense ?
A Limited Liability Company (LLC) is a business structure allowed by state statute. By filing form 2553 - you may choose a different tax treatment for the LLC besides the sole proprietorship. Also you file form 2553 to change tax treatment.
One option to choose S-corporation treatment for your LLC.
Any structure may use retirement plan. However in case S-corporation - employer's contribution is treated as part of the reasonable wages."
(3) and I still have I pay regular income tax on the remaining 80k left over on paying myself 120k salary, right ?
Please consider following example. If S-corporation pays you $80,000 in wages - the employer's contribution is limited by $20,000 (25% of wages). In case of SEP - $80,000 will be subject of FICA and income taxes and $20,000 are not subject of FICA taxes and income taxes are deferred - but that amount still deductible for the S-corporation as business expenses. For purposes of determination if you are paid reasonable wages - the total amount $80,00+$20,000=$100,000 is considered.
Customer: replied 2 years ago.
Relist: Answer quality.
I am still confused with Lev's answer. And I am not sure if he is interpreting my question correctly. Or may be I am not understanding his response well (most probably it is the second reason!).
***************************
So effectively, for tax purposes there is no difference between filing your company as S-Corp originally versus filing it as LLC and submitting form 2553 to treat it as S-Corp ? After filing 2553, I still have to worry about running payroll, I have to pay FUTA and SUTA taxes - what else do I need to do ? How do we compare these 3 choices - SMLLC without 2553, SMLLC with 2553 asking IRS to treat it as S-Corp and filing the company as S-Corp.

Thanks again.
Expert:  R. Klein, EA replied 2 years ago.

LEV covered most of the issues pretty well, I thought.

 

The biggest difference between becoming an S-Corp and not has to do with the "reasonable salary" and whether or not you want to pay into the Social Security system more than you need. Since that is easily 10.4% to 12.4% of your earnings, it can be substantial.

 

I can't tell you what a "reasonable salary" is, but I can tell you what an "unreasonable" one is. I say this, because if you don't want to pay into the SS more than necessary, then you might find 50K or 60K "reasonable" and minimize your SSA tax. You do that with the offset being that you cannot contribute as much to certain types of retirement plans.

 

A sole proprietor is not responsible for SUTA/FUTA, but this tax is usually pretty light ($56 FUTA per year, and state may be as low as a few hundred dollars) if you have a one-person payroll.

 

Your "three choices" have the following effect:

 

1. SMLLC no 2553 = taxed on Schedule C as a sole proprietor. Not subject to SUTA/FUTA, but ALL income subject to Social Security & Medicare taxes. Example: $200K earnings subject to all income tax and SS tax up to $110K and Medicare tax on all $200K.

 

2. SMLLC with S-Corp election = "Reasonable" wages must be paid, but you have some discretion as to how much is wages, and how much is your "profit distribution". Anything paid out as a profit distribution is NOT subject to SS OR Medicare taxes under current law. So if you pay out $60K in wages. Example: $60K wages subject to SS and Medicare. $135K net profit subject to NO Medicare or Social Security. Estimated SUTA/FUTA $200-400/year.

 

3. S-Corp instead of an LLC - NO TAX DIFFERENCE from #2, however you have more specific record-keeping, and legal requirements than an LLC electing to be taxed like an S-Corp.

 

 

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
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Expert:  Lev replied 2 years ago.

So effectively, for tax purposes there is no difference between filing your company as S-Corp originally versus filing it as LLC and submitting form 2553 to treat it as S-Corp ? After filing 2553, I still have to worry about running payroll, I have to pay FUTA and SUTA taxes - what else do I need to do ? How do we compare these 3 choices - SMLLC without 2553, SMLLC with 2553 asking IRS to treat it as S-Corp and filing the company as S-Corp.
When you are writing "filing your company as S-Corp originally" - that is not correct - you may not simply file the tax return as S-corporation.
If you register your business as a separate entity - it is generally either an LLC or a corporation.
If you do not file form 2553 - your LLC is treated as a solo proprietorship is that is a single member LLC or as a partnership - if there are several members. To treat it is S-corporation you should file form 2553 and specifically choose such treatment.

 

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