Let me see if I can recap... It appears that you keep putting the questions out there, so I'll try to hit on every question here:You said
"The very first interest that drew us to this idea was to save money i.e. less taxes for the individual. The fact that with an LLC we were each paying self employment tax (our social security). Members felt heavily burdened by this and as such an S corp was suggested. In an S Corp it appears the business has to pay these taxes (in a way it seems to me you pay for these taxes but now it comes directly through the business and out of your profits)
For LLC's, Partnerships
, and Sole Proprietorships, BOTH sides of the social security and medicare (the 1/2 that the corporation normally pays PLUS the 1/2 that the corporation withholds and pays on behalf of the employee) come out of (are paid based on) profits.
All of these entities are what are called pass-throughs
, for federal tax
purposes (The business itself isn't taxed, but rather the profits (or losses) are passed through to the individual owners on their own 1040 tax return
... any return that is done for the company is simply to calculate how much profit or loss passes through to the person.
An S-Corp is ALSO a pass through... BUT has some traits that make it LIKE a regular C-Corporation. Shareholder
employees take a salary, and then any profit above THAT is passed to the shareholders as a dividend
(still has to be taxed, because it's a pass-through, but there's no social security taxes on dividends).That's where the self employment tax savings comes from (the salary part still has the same SS & Medicare cost - half is being paid out of your wages and the other half out your share of the company's profits) BUT the dividend portion of profits (over and above any salaries paid out) has no social security and medicare paid on it
In other words, as I stated above ... IF you paid every penny of profit out in salary to yourself, the social security and medicare cost (what we call self employment tax, for LLCs) it's just that 1/2 of it would be paid out of wages and the other half paid by the company (out of your profits).
HOWEVER, if you have a profit of $100,000 and pay yourself a $50,000 salary ... there will be NO social security and medicare paid on that $50,000 dividend.You Said
"It is my understanding that as members of an S Corp we also need to pay unemployment but cannot receive benefits. Is this true?
The S Corporation remains responsible for paying the Federal
Unemployment or FUTA
tax in relation to employees, os if you take that reasonable salary, the unemployment taxes ARE paid based on the salary BUT you are eligible for benefits AS an employee (It's only when you try to completely escape the self employment taxes by paying NO salaries and taking ALL profits in dividends that there would be no FUTA coverage - AND in that case the IRS
will probably come in and reclassify part of that dividend as a salary anyway if the company is making profits).
But yes, since you are an EMPLOYEE of the company, which you own as well, in an S-Corp you WILL be entitled to the unemployment benefit associated with that salary
(Remember however, that the portion you are taking as a dividend is not having payroll taxes
taken out, so your benefit will never be as high in relation to your TOTAL earnings as those employees whose ONLY income IS the salary
"Another question that has come up is that the business profits do not need to have social security tax paid on them. Is this true and if so can you enlighten us on what this might mean to us? The same CPA that told us this told us we could have reasonable salaries and take the remaining in profit. Is this true
Yes, this is really the same issue as your first question. IF you are being profitable IRS will REQUIRE that you take part of that as salary, and again, this is where the self employment tax savings come in (the dividends - the profit over and above the salary - has no self employment taxes paid on it)You said
" The main initial question is whether we should make this change and as such would like to see what the pros and cons of doing so would be. What does it take to become and maintain an S Corp Versus an LLC? Is filing/record keeping significantly more involved? What would be the advantages to becoming an S Corp? And anything else you can think of to help us understand and make a good choice.
A little about our company - We are registered in Washington State; there are 4 members; we build kit homes; we have one employee; presently the shares are divided with 2 members @ 6%, 1 @ 15% and 1 @ 73%. The percentages may change as the major..."
All you have to do to become an S-Corp is file IRS form
2553 - Form 2553
You need to do this by March 15 of next year for it to be effective for the 2014 tax year. Ideally you'd want it to be filed before the end of the year. This will make all of the things happen that we've been discussing above. (no self employment tax on dividends, etc)
One thing that you should know about S-Corps is that the dividends have to paid out in exact proportion with ownership percentages.
If you remain as an LLC, you can (in your operating agreement) set up profit, losses, gains, etc. etc to be shared in any way you like. With the S-Corp, because you're now SHAREHOLDERS, the profits and losses will be distributed on a k-1 to be carried to your personal return
in the same proportion as the shares you ow (percent of the company owned).
The cost for that tax benefit on the self employment taxes is the more rigid structure of the S-Corp, the need to do payroll taxes quarterly
(when you have income), the need to file and 11230-S (S-Corp tax return, which then issues K-1s to each owner to be carried to their own return), etc.
SO yes, more ADMINISTRATIVE overhead with the S-Corp and less flexibility.
In my opinion it comes down to whether you are regularly profitable enough that there will be significant Self employment tax earnings.
Hope this helps
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