Have a Tax Question? Ask a Tax Expert
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If you are an LLC, you are taxed as if you are a partnership if there is more than one owner, and taxed individually if you only have one owner.
You can elect to be taxed as a corporation or S corp as well.
The home health agency would benefit from being an S Corporation, over an LLC, because the owners employment taxes will be lower.
But, with an S Corp you take away double taxation which occurs when a Corporation distributes profits to their shareholders.
Could you give me a quick synopsis of what exactly is involved in the owners employment taxes that you are saying would be lower for the home health ageny?
Okay, if you are an LLC you pay self employment taxes on 100% of your profits. With the S Corp you pay yourself a salary, and the salary is all you pay your employment taxes on.
Ok. So what could be a legal amount to give the owner of a home health agency? Are you saying that I could say that I'm only paying myself 20000 dollars a year to be the manager and the rest would be taxless profit?
You would still have to pay income tax. You pay income AND self employment taxes
But, you would have to pay yourself a "reasonable amount" which the rule of thumb in the industry is 60% salary 40% non-salary
Ok. What do you mean my 60% salary and 40% non salary?
If you earned $100,000 profits, you would have $60,000 salary taxed with both income and employment taxes and 40% profits just taxed with income tax
Do you have any more questions about this topic?
Ok. So if you had an LLC then you would have 100,000 taxed both income and employment?
Yes, that is correct
Ok. Wow. That is HUGE for the future of my business
Yes, an S corp is typically the way to go for a small business.
Are there any other differences between the two?
You can have both - you can have an LLC and have it taxed as an s corp
How do you do that?
And what benefits would there be to doing that?
Well, you set up the LLC and then you file an election to be taxed as an S Corp
The benefit is that you would get the legal benefits of an LLC (ease of formation, don't have to keep up with recordkeeping required for a corporation)
Ok. How soon would I be able to file for an election after I form it as an LLC?
And how is the LLC easier to form?
It's more of a legal thing - LLCs don't have the same corporate reporting requirements
You could do it immediately
And how long does the process take? And also, is that what you would recommend?
You file form 2553 with the IRS
It just takes the time it requires for the IRS to process the form
About how long is that usually?
I would recommend the LLC because it's easier to form, you don't have all the corporate requirements, etc
Well, the election is effective as of the date you are filing it....so if you filed it on January 1st but it took until March 1 for the IRS to process, it would still be effective January 1st
Ok. Thats great. Now what do you know about the fact that s corps exist perpetually while a death or withdrawal of a member could dissolve an LLC?
That's more of a legal thing...but if you had multiple members with the LLC then the LLC wouldn't cease just because one member died if you have the lawyer draw up the papers right
Ok. Also, it says that stock in S Corps are freely transferable. It says with LLCs that the approval of the members is required. But if I am the only owner, then that should not be a problem. Correct?
That would not be a problem if you're the only owner.
Also, how often are businesses' 2553 forms rejected when it comes to entities like home health agencies?
Oh they are never rejected. It's just an election. They are never rejected
Well why doesn
sorry about that
That's fine. Whenever you hit "enter" it sends the message
Well why doesn't everyone just set up they're businesses as LLCs with S corp taxation? Or is that the new trend and I am just behind?
It's a decision everyone needs to make and consider with their attorney and tax professional. It is common to see LLCs taxed as S Corps
Someone may not want an S Corp because they want to have a foreign owner (foreign people are not allowed to be shareholders of S Corp)
Also, S Corp can only have one class of stock, so a business may want two classes of shareholders and that doesn't work
Ok. That makes sense. So I am about to go to bizfilings and register is as an LLC and fill out the paperwork on monday to be taxed as an S corp
Sounds good to me
Ok. Sounds good. So is there any advice you could give me on how to handle my taxes in the first business I've ever owned. Maybe some tricks to the trade and some advice special to the healthcare industry?
Actually, my advice would be to get a good tax accountant in your area. You need to focus on the business aspect. The tax issues can be complex, and require a lot of detail. A professional should handle it for you
Ok. That sounds good. Do you know anything about the industry non tax wise that could help any?
I can only really tell you about taxes, did you have any more tax questions?
One last thing. Let say that you go by the 60/40 you spoke of. Would that mean that if I made 200,000 in profits that I would have to get taxed on 120,000 of it? Even is listed salary is only like 60% or so (about how much some managers get paid)
You would have $120,000 that is taxed both self employment and income tax, and $80,000 which is taxed just on income tax
And that is the industry requirement? What is you tasked it at 50/50? or even 0/100. Who regulates what this particular field can tax at?
It's not a hard and fast number. The rule is "reasonable salary" - which there is no definition of what is "reasonable" the 60/40 is just a rule of thumb
"reasonable" would be what people in your industry who do the same thing as you do get paid
And who would know the exact answer to that?
It's a personal decision that you and your tax pro would have to work out.
There is no exact "answer" but if the IRS feels you aren't paying yourself a large enough salary, they can reclassify your earnings and assess employment taxews
what happens when they reclassify your earnings?
They make you pay back taxes from the past at a new rate?
They make you pay self employment taxes on that earnings, plus penalties and interest
And when people speak of business practices that are able to be "written-off" in taxes, what exactly are they referring to? For example, what would be the difference in paying for a trip with your personal money from your salary and paying as a business expense?
A trip can only be deducted if it's for a business purpose
You can only deduct things that are for the business. You can't make personal expenses business expenses.
Sorry for my bad explanation. I was referring to a business trip. So basically those same questions but substitute "paying for a business* trip"
You can deduct that
Just deduct the cost as an expense
And how does that help? If you're the owner it would be the same about coming out of your pocket in the end. Right?
Or does it have to do with taxes?
Yes, it's still coming out of your pocket but you don't pay tax on that money
on the expenses?
That is correct
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What do you know about series LLCs?
ok. what about the difference between a domestic llc and a professional llc?
oh ok. thats what I was wondering
and what exactly do you know about the series llcs?
No. That is all. Thank you very much.