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We have FLorida LLC taxed as partnership. Because we are…

We have FLorida LLC taxed...
We have FLorida LLC taxed as partnership. Because we are retirement age, were concerned about future SS benefits, so on the advise of the accountant started filing W-2 in addition to 1099. It seems that now we are taxed double. Heard that as LLC we shouldn't be filing W-2, but rather have guaranteed pay. Not sure that it is even legal to have LLC filing W-2.
The accountant now said we should go S corp. Not sure it is a good arrangement for us.
Concerned that if we would attempt to amend 3 last year returns to change to guaranteed payment, it would not even be possible. Any advice?
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Answered in 5 minutes by:
1/22/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,847
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, to clients on three continents, since 1986.

Bear with me a moment while I type up my response. Then if you have further questions we can go from there.

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That's right. Self employed individuals (Sole Proprietors, LLC members not taxed as a corporation, partners) pay their Social Security and Medicare tax based on the Schedule SE (Self -employment tax)

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This person seems quite clueless. The S-Corp (unless you are at a certain strata of profit between S-Corp salary and expenses, and the social security wage base) simply increases administrative overhead.

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There's NO saving on income taxes. And again, there's a trade-off between the small possible SS & Medicare tax savings and the additional administrative overhead of the S-Corp (required payroll, paying in Social Security and medicare at least monthly, quarterly 941's payroll tax returns, the remaining need to still pay regular estimated taxes (or withhold more from the W-2), etc.

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When the person recommending S-Corp taxation also does payroll be afraid, be very afraid :0)

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And yes, if you want a guaranteed wage like income (as opposed to simply distributing profits periodically) the partnership makes guaranteed payments - Ptnrs must agree becasue this can create a loss at the partnership level and can affect different partners differently - depending on how you've set things up in your operating agreement.

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Remember that distributions of capital (profits, contributed capital, etc) are not taxable... they simply lower your tax basis in the "partnership."

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Some people call this a draw (becasue they are drawing on the profits, which will be taxed on the 1065 anyway)

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ON the double taxation issue. If there was a W-2 and then the Self employment tax was paid on the k-1 income as well, you weren't taxed twice, becasue those wages would be a subtraction from the taxable profit flowing through the K-1.

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But again, self-employed individuals (a very specific tax term - peopl who are involved with their business are either (1) self-employed and pay Self-employment tax, the way self- employed pay social security and medicare or (2) shareholder/employees (C-Corps and S-Corps) where a wage is paid and incremental profits are passed from the K-1 (with an 1120-s K-1 for the S-Corp) ... OR ... as a taxable dividend from the C-Corp

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The only tax savings to be had from the S-Corp CAN be on Social Security and Medicare tax.

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For the portion of your profits that you take in Salary, there's no difference between a self-employed individual and a shareholder/employee.

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The self-employed individual pays self employment tax on schedule SE (both the employee and the employer halves)

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The S-Corp shareholder/employee withholds 1/2 from the IRS required salary and then the S-Corp (you) match the other half and pay it in

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SO it's only in those cases where you can get away with a small salary (IRS will challenge this if they don't believe the salary is reasonable) and the profit is high enough (over and above the S-Corp salary and other expenses) where there can be some savings on the Social Security and Medicare that doesn't get levied against the K-1 pass-through income for an S-Corp.

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And again, that comes at the cost of additional overhead. NOW, if you already HAVE employees and have the payroll set up, that can begin to make more sense.

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But the costs for that (along with the less quantifiable issues of headache and audit risk) still need to be measured against any payroll tax savings.

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Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit"– That’s the only way I’ll be credited for the work.

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But again, if you need more on this,please let me know.

Lane

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Customer reply replied 6 months ago
Unfortunately, this is not easy for me. It is not that we are trying to save on taxes. We can't figure why numbers on Social Security differ so much year from year.
What is important for me is:
If we keep W-2 (as there is no double taxation), considering that I do not want to switch to S-corp, is it illegal or darn wrong? In a nutshell, should we change it?
And no, we do not have employees, it is family.
Thank you,

You can't keep a w-2 as an LLC partnership, there will eventually be an audit.

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It's hard to say what's going on without looking at your return, but the amount that you pay into social security is based on your share of profits.

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Self-employed people (as opposed to shareholder/employees) live off their profit

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If you like, we can discuss over the phone ... would be a way to get the details out confidentially (other users on the site can see this)

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IRS will likely let this pass when the see the change. You are not the first "tax" partnership to figure this out and make the change ... It's when they get to you first, that there can be problems.

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They call this "voluntary compliance."

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The reason? You ARE paying that social security and medicare through the salaries, so you'r not evading anything. ... One of the reasons that they scrutinize S-Corps so highly is some shareholder/employees try to show a VERY small salary and let the rest of the profit flow through the K-1 with no Social Security and Medicare tax paid.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,847
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
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Customer reply replied 6 months ago
Lane,
You mentioned K-1 with no SS and medicare tax paid. Maybe it is our problem, I did not know that.
Calling is probably a good idea, I am simply not ready right now. I will take a few days to "chew" on that and then come back and then will have a call to you.
Thank you very much for clarification.

Sounds good. I'll be here.

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By the way, only the S-Corp gets that ... no SS&Medicare on k-1 portion of the profit.

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LLC/partnersip owners pay self-employment on everything (up to the Social Security wage base)

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This is what those whose bread and butter is payroll tout so highly.

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Bu what they don't tell you is that it's only a savings on Social Security and Medicare, not federal and state income tax, that's it's only on the portion of profits ABOVE the salary, that IRS forces a reasonable salary anyway, AND that there are additional costs that come with the S-Corp.

...

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