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Hi, my name is Mark. I will be happy to help you with your questions.
Both an LLC an S-Corporation are pass-through entities. This means that the income would pass through to the individual members and shareholders. If you own 100% of a LLC it is treated as a disregarded entity. This would be reported on schedule C of your individual tax return. You would pay both income tax and self-employment taxes on this income. Self employment taxes are 15.3% of the $118,500 of earned income. Amounts above this are taxed at 2.9%. With a S-Corporation you would need to file a separate tax return (1120S). You would need to pay yourself a reasonable salary. So you would need to worry about payroll taxes and payroll tax reports. The income from a S-Corporation would not be subject to the self-employment tax. So with a S-Corporation you would be able to avoid some of the self-employment taxes.
Your best bet would be a S-Corporation. You would have some additional administrative expenses with a S-Corporation. You would have to file a separate tax return. You would also have to prepare payroll, and payroll tax reports (w-2's, w-3's, state forms, 941's, and 940.) Generally you would want to pay yourself about half of the earnings as a salary. Based on your projection this would be $90,000. Your savings would be $28,500 x 15.3% or a little more than $4,360.
Yes, with a S-corporation you would need to prepare payroll and prepare W-2's, w-3's, 940, and 941's. So there is an additional administrative costs. Quickbooks has a payroll module that will help you prepare the forms. There are companies like ADP that will also process the payroll for you.
15.3% is for payroll taxes. 6.2% FICA and 1.45 % is for Medicare. If you are an employee you would be 1/2 (7.65%) and your employer would match this amount (7.65%). The combined amount is 15.3%. Where are you coming up with $28,000?
With a S-Corporation you would not need to make estimated payment these could be made through withholding on your payroll. Can you give me a little more information. Do you usually itemized. I run a quick projection married filing separately - $180,000 as a LLC and $90K wages and 90K S-Corporation income. Please give me a moment.
At $180,000 with a LLC the taxes came to $60,678. With a S-corporation ($90K wages, and $90K for S-Corp income) the taxes came to $41,993. You would also pay $12,717 in payroll taxes on the wages. So the total tax burden would be $54,710.
The amounts that I gave you should be a good estimate. The S-Corporation would save you about $5,000 but you would have the additional cost of another tax return and payroll to deal with. This $54710 was just your federal taxes.
The $54,710 includes the amounts for payroll taxes on the $90,000 of wages.
I did not consider deduction (travel / home office etc). I assumed the $180,000 was the net amount after the deductions. That is why there is such a large jump in taxes. What was the adjusted gross income on your return last year. It would be better for you to become a S-Corporation. You will save at least $5,000 in taxes.
With a S-corporation you would be able to deduct any ordinary and necessary expenses. So you would be able to deduct any expenses that are associated with the generation of the income.
It sounds like your income will be about $30K more this year. You would need to pay yourself a salary in the range of $60,000 and then $60,000 can pass through the S-corporation. You would save about $9,000 in taxes.