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Hello, I am the single owner of a towing company. It is

Hello, I am the single owner...
Hello,

I am the single owner of a towing company. It is formed as an LLC. I have 4 full-time employees including myself and one part time book-keeper. Two of my truck drivers are salary, my secretary is hourly, and I pay myself as I need. I was told that if I structured the payroll in a different way I would be able to decrease the amount of taxes I owe. Not sure if this is true, but my question is: How can I structure my business to pay the least amount of taxes possible? If there are ways other than payroll please include those as well. I will be happy to provide you with further information if needed. Thank you!
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Answered in 25 minutes by:
9/2/2012
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,331
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!
Whatever you were told is correct - however that is not a matter of structuring the payroll...

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Most states also permit "single member" LLCs, those having only one owner.

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.


See for reference - http://www.irs.gov/businesses/small/article/0,,id=158625,00.html

A single member LLC (SMLLC) can be either a corporation or a single member "disregarded entity". Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a "disregarded entity" which is taxed as a sole proprietor for income tax purposes.


Assuming your LLC is disregarded entity - you should not pay wages to yourself - instead all income will be treated as your self-employment income - you will calculate your net self-employment income - and that amount will be subject of both - income and self-employment taxes.
However... See for reference - http://www.irs.gov/businesses/small/article/0,,id=158625,00.html
If the LLC does not make a classification election, a default classification of disregarded entity (single-member LLC) or partnership (multi-member LLC) will apply. The election referred to is made using the Form 8832, Entity Classification Election - http://www.irs.gov/pub/irs-pdf/f8832.pdf .

Thus you may choose the LLC to be treated as S-corporation.

 

If you choose S-corporation tax treatment for your LLC - you will be an employee of that S-corporation - and will receive wages as all other employees.
S-corporation does file an income tax return. Wages paid to the owner are normally deducted as business expenses. However if S-corporation has income after all deductions - it doesn't pay taxes - the income is passed to shareholders (to you in case of single owner) - means shareholders will report that income of individual tax returns - regardless if that income distributed or kept within S-corporation.
That passed through income is not subject of employment or self-employment taxes - so there will be potential saving.

However - as long as the business is not profitable or the profit is really small - I would not recommend to use S-corporation. The reason for that - you will have additional overhead but without relatively large profit - there will not be any tax savings.

You may choose S-corporation treatment later - when the business will make an annual profit at least $40,000.

 

So

- there will not be any difference for employment taxes paid to other employees.

- with S-corporation - you might have tax saving on your own income - but only if that is a substantial income (I assume above $40,000)

- there would be additional income tax return for the S-corporation.

 

Let me know if you need any help.

Be sure to ask if any clarification needed.


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Customer reply replied 5 years ago

THANK YOU for your quick and informative response!


 


Just to clarify, if the company was making more than 40k in profit a year you suggested switching to an S-corp. How did you come up with the $40k?


 


Also, what kind of additional overhead can I expect from switching to S-corp?


 


 

S-corporation is required to pay you wages. Generally, an officer of a corporation is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages.
The potential self-employment tax saving would be 13.3% of the earnings above reasonable wages MINUS additional overhead expenses for filing S-corporation's income tax returns.

See instructions for S-corporation income tax return - form 1120S - www.irs.gov/pub/irs-pdf/i1120s.pdf - see page 38 - the time needed to complete and file.
According to the IRS - preparing the form in average is taking 56 hr. (or might take up to $150 hours) - assuming at least $20/hour rate for the tax accountant - that might cost ~$1200 or more in additional overhead.
If you are working full time - 2000 hours per year - I assume that your reasonable wages might be at least $30,000 ($15/hour) - however a salary amount must be determined and the level of salary must be reasonable and appropriate.There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

So - assuming your net profit is $40,000 - as a self-employed - you would be liable for self-employment taxes $40,000 *13.3% = $5320.
With $30,000 reasonable wages - there will be employment taxes - partly paid by you and partly by S-corporation - total 13.3% or $3990.
So potential saving is expected to be $5320 - $3990 = $1330
Minus overhead for filing S-corporation tax return - $1200
So net saving will be minimal - but still there will be some saving.
Please be aware that is a very raw estimate - your actual situation might be different.
pay.
Let me know if you need any help with tax related issues..
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,331
Experience: Taxes, Immigration, Labor Relations
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