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My partner & I have set up an LLC with SCorp filing.

Customer Question
My partner & I...

My partner & I have set up an LLC with SCorp filing. However, we need to quickly decide on the best tax benefit. He has been an independent contractor for 9 months with no tax filings. He has 3 months left of larger pay coming in. Would it be better to bill the last three months through the company or as an independent contractor. He is the only employee right now. He has no dependents and few deductions

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I will be contributing to the company eventually but there is no capital in the co now.

Submitted: 4 months ago.Category: Finance
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Answered in 13 minutes by:
10/17/2017
Financial Professional: Lev, Tax Preparer replied 4 months ago
Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 31,321
Experience: Personal Investment, Tax Preparation
Verified

As you might know - S-corporation pays NO income taxes - all taxable income is passed to shareholders and is added to other taxable income on individual tax returns.

So - from income tax prospective - that really woudl not matter whether income is reported directly to the individual or to S-corporation and passed to that individual as a shareholder.

Generally - same deductions are reported as business expenses - and there will not be difference in net taxable income.

The difference will be is with self-employment / employment taxes.

Part of S-corporation income is passed to shareholders/employees as wages - and that part is subject to employment taxes which are very similar to self-employment taxes,

However - with S-corporation a part of income passed via K1 is NOT subject to employment taxes - and that provide potential tax saving.

The issue is that we need to setup a payroll for S-corporation - and that comes with some overhead - additional expenses.

Thus we need to have relatively large amount passed on K1 to have real saving.

Let me know if you need help with estimations.

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Customer reply replied 4 months ago
If 50% of the amount is via salary and 50% is via owners draws what type of tax is imposed on the draws?
Customer reply replied 4 months ago
For instance the income to-date as an independent contractor is approximately $72,000 and no taxes have been paid yet on this. The remainder of the billings for the last three months may be $30,000-$40,000. Would it be possible to take $10k-$15k in salary and $15k-$20k in draws? I'm just wondering the tax liability that will be placed on the draws and worried about the taxes due on the $72k.
Financial Professional: PDtax, CPA, MBA replied 4 months ago
PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 4,827
Experience: Tax professional and business consultant for 35 years.
Verified

I'm PDtax. I can respond because you asked for a new professional.

I would do things differently. But it would help to know how much income has been earned after expenses in the S year to date, and what you have divided up.

It also suggests that I transmit my response privately, as my advice to you is not for public consumption.

I'll make a phone call offer to discuss.

PDta

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Financial Professional: PDtax, CPA, MBA replied 4 months ago

I never heard back, so I will opt out.

Good luck with your inquiry.

PDtax

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 4 months ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 13,521
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

HI, MY NAME’S LANE - I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986.

If you’ll please bear with me for a minute I’ll type up my initial response, and then we can go from there if you have further questions on this.

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 4 months ago

I'll try saying this differently. Whether someone files a schedule C or elects S-Corp and files and 1120-S, there's no difference in Federal income tax. It all flows to your personal 1040.

...

(from the required salary of the S-Corp W-2 - to line 7 of your 1040 - and the profit above that on the K-1 - to line 17 of the 1040)

...

The only difference between the two is for Social Security and medicare taxes.

...

As a independent contractor (schedule C) or as a single member LLC(schedule C) or even a partner in a partnership (form 1065 ALL to the K-1 to the 1040) these people that IRS calls Self-employed pay their Social Security and Medicare tax on the Schedule SE.

...

It's 15.3% of profits (both the employer and the employee half, that wuld normally be withheld from the paycheck).

...

With the S-Corp, for the SALARY portion of your profits it's the same (1/2 is withheld from your required salary, and the other half is paid by the S-Corp (you).

...

But on that profit that flows through the K-1 (over and above the salary and the S-Corp's other expenses) there's NO Social Security and Medicare levied.

...

So it's on that amount of PROFIT over and above salary and other expenses (UP TO the wage base of 127000 where there's no more Social Security tax anyway) that there is a 15.3% savings on that k-1 profit that's passed through.

...

How much of that you physically take out as a draw is irrelevant. What people call a draw is what an accountant calls a distribution. It's just you USING that profit that's going to be taxed as profit either way.

...

So again, its the difference between your salary and profits up to 127000 that there CAN be a 15.3% payroll tax savings.

...

For federal income tax, it's all the same.

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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 13,521
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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