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In California if you form an LLC do you have to pay yourself…

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In California if you...

In California if you form an LLC do you have to pay yourself a salary

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

My wife has a photography biz it started making money

Accountant's Assistant: Is there anything else important you think the Accountant should know?

The Self employement taxes are brutal so we were going to form an LLC for her can we pass through all earnings without a payroll

Submitted: 2 months ago.Category: Finance
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5/30/2018
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 2 months ago
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Finance
Satisfied Customers: 2,740
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 2 months ago

As an LLC your net income is subject to self employment tax. --You are not able to pay yourself was a W2 employee and the earnings will be subject to SE Tax

What you could do is, elect to be taxed as an S Corp using Form 2553 Election by a Small Business Corporation. --The S Corp pays the employees a reasonable salary, which is subject to employment tax. Then the remaining profit is passed through to the owners of the S Corp and not subject to employment tax.

Please let me know if you have any additional questions.

Thank you!

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Customer reply replied 2 months ago
sorry i should have specified that it would be S election
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 2 months ago

If you elect to be taxed as an S Corp, then your wife would pay herself thorough payroll what she would pay someone else to perform the same duties via payroll.

The remaining net profit is passed through to the shareholders of the S Corp, not subject to self employment tax.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 2 months ago

Below is a link to the IRS concerning "reasonable compensation."

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 2 months ago

Thank you!

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