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You are here: Home > Small Business KB > Small Biz FAQs > LLC and S-Corps (superseded) > Is there a way to avoid Self-Employment tax?
  • Taxpayers Guide to LLCs and S Corps

    • Introduction

      • About the Author
      • Progressive Updates
      • Introduction Disclaimer
      • Shameless Self-Promotion
      • Book Introduction
      • Quick Reference 2023
      • Quick Reference 2024
      • Quick Reference 2025
    • Chap 1 - Business Entities, LLCs

      • Basic Business Entities
      • Sole Proprietorship
      • Single Member Limited Liability Company
      • Multi-Member Limited Liability Company
      • Partnerships
      • Being Considered a Passive Business Owner
      • Rental Partnerships
      • C Corporations
      • Personal Service Corporation
      • Professional Corporations and LLCs
      • S Corporations
      • Section 199A Qualified Business Income Tax Deduction
      • S Corp Versus LLC
      • LLC Popularity (Hype)
      • Formation of an LLC or S Corp
      • Nevada Fallacy of an LLC (or Delaware or Wyoming!)
    • Chap 2 - Customized Entity Structures

      • Your Spouse as a Partner (Happy Happy Joy Joy)
      • Family Partners
      • Real Estate Holding Company and Operating Company
      • Parent-Child Arrangement (Income Flows "Up")
      • Parent-Child Arrangement (Income Flows "Down")
      • Multi-Member LLC That Issues Invoices
      • Things to Work Through with Multiple Entities
      • Recap of Benefits with Multiple Entities
      • State Apportionment with Multiple Entities
      • California Multi-Member LLC S Corp Twist
      • C Corporation as Mothership
      • Holding Company versus Management Company
      • Pure LLC Holding Company
      • Economic versus Equity Interests
      • Structuring Deals with Angel Investors
      • ESOPs and S Corporations
      • Another Employee Ownership Situation
      • Medical C Corp
      • Fleischer Tax Court Case
      • Joint Ventures
      • Loans or Capital Injections
      • Using a Trust in Your Formation Considerations
      • Operating Agreements
      • Exit Plans, Business Succession
      • Liability Protection Fallacy of an LLC
      • Charging Orders
      • Using a Self-Directed IRA to Buy a Rental, Start A Business
    • Chap 3 - S Corporation Benefits

      • Avoiding or Reducing Self-Employment SE Taxes
      • Tax Savings with Health Insurance
      • S Corp Hard Money Facts, Net Savings
      • Ancillary Benefits with S Corporations
      • Officer Compensation with Solo 401k Plan Deferral
      • W-2 Converted to 1099
      • Net Investment Income, Medicare Surtax and S Corps
      • Being a Passive Business Owner
      • Three Types of Income
    • Chap 4 - The 185 Reasons to Not Have an S Corp or LLC

      • Chapter 4 Introduction
      • Additional Accounting Costs
      • Additional Payroll Taxes
      • SEP IRA Limitations
      • Trapped Assets
      • Distributing Profits, Multiple Owners
      • Other W-2 Income
      • State Business Taxes (Not Just Income Taxes)
      • Deducting Losses, Trapped Cash
      • Distributions in Excess of Shareholder Basis
      • Stock Classes
      • Vesting and Expanding Ownership
      • Bad Loans to the S Corp
      • Social Security Basis
      • Payroll Taxes on Children
      • C Corp to S Corp Problems
      • Going Concern
      • Recap of S Corp Downsides
      • Growing Business, Debt Service
    • Chap 5 - State Nexus Problems

      • Chapter 5 Introduction
      • Chapter 5 Disclaimer
      • Wayfair Case Part 1
      • Nexus Theory
      • Constitutional and Legislative Standards
      • Sales and Use Tax, Income Tax
      • Physical and Economic Presence, Nexus Attached
      • Wayfair Case Part 2
      • Services and Tangible Personal Property (TPP)
      • Costs of Performance, Market-Based Approach
      • Allocation and Throwback
      • FBA, Drop Shipments, Trailing Nexus Revisited
      • Recap of State Tax Issues
      • State Tax Issues and Nexus
    • Chap 6 - S Corporation Election

      • Formation (Election) of an S-Corp
      • Electing S-Corp Filing Status, Retroactive for 2025
      • Another Option, Dormant S Corp
      • Missing Payroll, Now What
      • Mid-Year Payroll
      • Nuts and Bolts of the S Corp Election
      • Ineffective S Corp Elections
      • S Corp Equity Section
      • Terminating S Corp Election
      • Distributed Assets
      • 5 Year Rule
      • Life Cycle of an S Corporation
    • Chap 7 - Section 199A Deduction Analysis

      • Section 199A S Corp Considerations
      • Calculating the Qualified Business Income Deduction
      • Section 199A Defining Terms
      • Specified Service Trade or Business (SSTB) Definitions
      • Trade or Business of Performing Services as an Employee
      • Services or Property Provided to an SSTB
      • Section 199A Deduction Decision Tree
      • Section 199A Reasonable Compensation
      • Section 199A Pass-Thru Salary Optimization
      • Cost of Increasing Shareholder Salary
      • Section 199A Rental Property Deduction
      • Negative Qualified Business Income
      • Qualified Property Anti-Abuse
      • Aggregation of Multiple Businesses
      • Section 199A W-2 Safe Harbors
      • Additional Section 199A Reporting on K-1
      • Section 199A Frequently Asked Questions
    • Chap 8 - Section 199A Examples and Comparisons

      • S Corp Section 199A Deduction Examples
      • Section 199A Side by Side Comparisons
      • Section 199A Basic Comparisons
      • Section 199A Health Insurance Comparison
      • Section 199A 200k Comparison
      • Section 199A 250k Comparison
      • Section 199A Specified Service Business Comparison Part 1
      • Section 199A Specified Service Business Comparison Part 2
      • Section 199A Phaseout
      • Section 199A Recap
      • Section 199A Actual Tax Returns Comparison
    • Chap 9 - Reasonable Shareholder Salary

      • Chapter 9 Introduction
      • IRS S Corp Stats
      • Reasonable S Corp Salary Theory
      • IRS Revenue Rulings and Fact Sheet 2008-25
      • Tax Court Cases for Reasonable Salary
      • Risk Analysis to Reasonable Shareholder Salary
      • Reasonable Salary Labor Data
      • Assembled Workforce or Developed Process Effect
      • RCReports
      • W-2 Converted to 1099 Reasonable Salary
      • S Corp Salary Starting Point
      • Multiple Shareholders Payroll Split
      • Additional S Corp Salary Considerations
      • Reasonable Salary Recap
    • Chap 10 - Operating Your S Corp

      • Chapter 10 Introduction
      • Costs of Operating an S Corp
      • New S Corp Puppy, What Do I Do Now
      • Accounting Method
      • 1099-NEC Issued to Your SSN
      • Take Money Out of the S Corp
      • Processing S Corp Payroll
      • Minimum Payroll with December Bonus
      • Taking Shareholder Distributions
      • Reclassify Shareholder Distributions
      • Accountable Plan Expense Reimbursements
      • Accountable Plan Requirements
      • Shareholder Distributions as Reimbursements
      • S Corp Tax Return Preparation
      • Distributions in Excess of Basis
      • Minimize Tax or Maximize Value (Economic Benefit)
      • Tracking Fringe Benefits
      • Other Tricks of the Trade with S Corps
      • Adding Your Spouse to Payroll
      • Chap 10 - Comingling of Money
    • Chap 11 - Tax Deductions, Fringe Benefits

      • Chapter 11 Introduction
      • Four Basics to Warm Up To
      • Section 199A Deductions – Pass Through Tax Breaks
      • 185 Business Deductions You Cannot Take
      • Depreciation
      • Small Business Tax Deductions Themes
      • Value of a Business Tax Deduction
      • Deductions the IRS Cannot Stand
      • Automobiles and LLCs, S Corps
      • Business Owned Automobile
      • Section 179 and Bonus Depreciation
      • You Own the Automobile, Get Reimbursed By The Mile
      • You Own the Automobile, Take Mileage Deduction
      • You Own the Automobile, Lease Back to Your Company
      • Automobile Decision Tree
      • Home Office Deduction
      • Tax-Free Rental of Your Home
      • Tax Home
      • Business Travel Deduction
      • Deducting Business Meals
      • Sutter Rule
      • Cohan Rule
      • Capital Leases versus Operating Leases
      • Putting Your Kids on the Payroll
      • Educational Assistance with an S-Corp - Section 127
      • Summary of Small Business Tax Deductions
      • Business Tax Return Preparation
      • Comingling of Money
      • Reducing Taxes
    • Chap 12 - Retirement Planning

      • Retirement Planning Within Your Small Business
      • Self Employed Retirement Plan Basics
      • Retirement Questions to Ask
      • Tax Savings and Tax Deferrals
      • Using a 401k in Your Small Business Retirement Options
      • The Owners-Only 401k Plan
      • Having Staff with a Solo 401k Plan
      • Self-Directed 401k Plans
      • Company-Sponsored 401k Plan
      • 401k Plan Safe Harbor Provision
      • Roth 401k Plans
      • Roth 401k Versus Traditional 401k Considerations
      • Two 401k Plans
      • Rolling Old 401k Plans or IRAs into Your Small Business 401k Plan
      • 401k Loans and Life Insurance
      • 401k Plans and Roth IRA Conversions
      • Turbo Charged 401k Plans
      • SIMPLE 401k
      • SEP IRA
      • SEP IRA, Roth IRAs and the Roth Conversion
      • Controlled Groups
      • Owner Only 401k Plans in MMLLC Environment
      • Spousal Attribution and Controlled Groups
      • Non-Qualified Deferred Compensation Plan
      • Exotic Stuff
      • Expatriates or Expat Tax Deferral Planning
      • Small Business Retirement Planning Recap
    • Epilogue

      • WCG Fee Structure
      • More About WCG
      • Consultative Approach
      • Core Competencies
      • No BS
      • Expectations of Our Clients
      • Final Words
    • Chap xx - Health Care

      • Disclosure and Updates
      • Gaming the HSA System
      • Health Care Summary
      • Health Savings Accounts (HSAs)
      • Long-Term Care
      • Multiple Employees
      • One Person Show or Husband-Wife Team, S Corporation
      • Section 105 Health Reimbursement Arrangement (HRA)
      • Section 125 Cafeteria Plans and Flex Spending (FSA)
      • Sole Proprietors and Single Member LLCs
    • Chap yy - Business Valuations, Sale, Exit Planning

      • Business Valuation Techniques
      • Buy-Sell Agreements
      • Deal Structure
      • Debt Service
      • Exit Plans, Succession
      • Purchase Price Allocation
    • Chap zz - Other S Corp Thoughts

      • 1099 Income as Other Income, No Self-Employment (SE) Taxes
      • Audit Rates and Risks with an S-Corp
      • Recap of S-Corps
      • Rental Losses with an S-Corp
      • Rentals Owned by an LLC Fallacy
      • W-2 or 1099-MISC That Is The Question
  • Expat and Expatriate KB

    • Expat FAQs

      • Are there any downsides to claiming the foreign earned income exclusion?
      • Are there exceptions to the bona fide residence or physical presence tests?
      • As an ExPat, do I need to file a State tax return?
      • Can I deduct mortgage interest paid on my foreign home?
      • Do I have to pass the same test each year?
      • Does voting through an absentee ballot mess up my bona fide foreign residency?
      • How do fluctuating currency values affect my taxes?
      • How do I handle my foreign rental property?
      • How do I qualify for the foreign earned income exclusion?
      • How do moving expenses affect my exclusion?
      • How do partial years work with the foreign earned income exclusion?
      • How do tax treaties affect my ExPat situation?
      • How does the foreign housing exclusion or deduction work?
      • If I am a self-employed ExPat, what taxes am I responsible for?
      • If I don't qualify for the housing deduction, can I still deduct expenses?
      • May I still make contributions to my IRA as an ExPat?
      • What amount can I deduct for foreign earned income exclusion?
      • What happens if my host country has a form of social security?
      • What is a tax home or abode, and how do they relate to each other?
      • What is considered foreign earned income?
      • What is foreign earned income exclusion?
      • What is the bona fide residence test?
      • What is the difference between foreign tax credit and deduction?
      • What is the physical presence test?
  • Rental Property KB

    • Rentals FAQs

      • Can I claim my residence as a rental, sell it for a loss and deduct the loss?
      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • Can I deduct the taxes associated with public improvements?
      • Can I rent out half a duplex or a room in my house?
      • Do I need receipts for my rental expenses?
      • Do rental properties offer good tax sheltering?
      • How are repairs and improvements different?
      • How do I handle my foreign rental property?
      • How do passive loss limitations affect me?
      • I purchased a rental property last year. What closing costs can I deduct?
      • If I don't have any rental income can I still claim a loss?
      • If I move back into my rental, how does that work?
      • If my employer provides a cell phone, is that income?
      • Is depreciating my rental a good thing?
      • My rental sale was a huge loss. What can I do?
      • Rentals Owned by an LLC Fallacy
      • What are tax issues with an LLC owning a rental property?
      • What are the exceptions to rental activities?
      • What are the rules on a home office deduction?
      • What is active participation versus material participation?
      • What is considered rental income?
      • What rental property expenses can I deduct?
    • Real Estate Pros

      • Are rental activities always passive activities?
      • Are there downsides to the real estate professional designation?
      • Are there specific material participation tests for real estate professionals?
      • Do I need to group my rental activities together?
      • How do I record the hours spent as a real estate professional?
      • If I meet the 750-hour test, do I also meet the 500-hour material participation test?
      • What activities count and don't count?
      • What are some of the IRS tricks to deny my real estate professional designation?
      • What are some of the tax court cases for real estate professionals?
      • What are the general tests for material participation?
      • What is active participation versus material participation?
      • What is the definition of real estate professional?
      • Why designate myself as a real estate professional?
  • Other Tax Information KB

    • Audits

      • Can I ignore an IRS notice or claim I never received it?
      • How can I pay my taxes or my notice of deficiency?
      • How can I prepare for my face to face or interview field audit?
      • How do I appeal the collections of unpaid taxes?
      • How does a joint return get handled during an audit?
      • How does bankruptcy affect my unpaid taxes?
      • How much is interest and penalty on taxes owed?
      • How should I respond to an IRS notice or letter?
      • What are my chances of being audited?
      • What are some of the types of IRS notices and letters?
      • What can the IRS do if I don't pay my taxes- what is the collections process?
      • What causes or triggers an IRS audit?
      • What if I cannot pay my taxes?
      • What IRS publications deal with audits?
      • What is the appeals process?
      • What is the period of limitations for an audit?
      • What types of audits could I face?
      • Who can be with me at my IRS audit or conference?
    • Charitable Contributions

      • Are there ways to earmark money for an individual?
      • Do I need receipts for my donations?
      • Does deducting charitable contributions cause an audit?
      • How do I determine the value of my donation?
      • What are some of the donations I can deduct?
      • What are some other charitable deductions?
      • What are the limits of my donations?
      • Who qualifies as a charity?
      • Why give to charities?
    • Education, Tuition Deductions

      • Are Educational Savings Accounts Worth It
      • Are There Tax Breaks for Going to College
      • Are There Tax Savings When My Employer Pays for My Education
      • Can I deduct the cost of sports, games or hobbies while in college?
      • IRAs and Savings Bonds To Help With Higher Education Costs
      • What College Expenses Can I Deduct From My Income
      • What constitutes a full-time student for tax purposes?
    • Homes and Real Estate FAQs

      • Can I deduct the loss on my primary residence?
      • Can I deduct the taxes associated with public improvements?
      • Can I exclude the gain on my home sale?
      • How does a Federal Disaster affect my casualty loss?
      • My home was destroyed- what deduction can I take? How do casualty losses work?
      • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
      • What are the rules on a home office deduction?
      • What is Cancellation of Debt? Is it taxable income?
    • Medical, Health Insurance

      • What are qualified medical expenses?
      • Why can't I deduct health insurance premiums?
    • Mortgages, Bad Debts

      • Can I deduct a bad debt on my tax return?
      • Can I deduct the loss on my primary residence?
      • Is cancellation of debt always taxable?
      • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
      • What is Cancellation of Debt? Is it taxable income?
    • Recordkeeping

      • Are there specific records I need to keep?
      • Do I need receipts for my expenses?
      • How does proper recordkeeping affect my audit results?
      • How long do I have to keep records?
      • How should I maintain my tax records?
      • What are the requirements for mileage records?
      • Why should I keep tax records?
    • General Tax Questions

      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • If my employer provides a cell phone, is that income?
      • Tax Brackets Misconceptions- Should I earn more money?
      • What is the marriage penalty and how does it affect our tax returns?
  • Small Business KB

    • Small Biz FAQs

      • Hobby Versus Business

        • 3 out of 5 Test
        • Hobby Versus Business Testing
        • Philosophy of Business Losses
        • Private Track Coach Deducts Business Losses for Eight Years, Court Says OK
        • WCG (formerly Watson CPA Group) Philosophy on Hobby Losses
      • Independent Contractors

        • Behavioral Control
        • Colorado's Criteria for Contractor Status
        • Employee or Independent Contractor
        • Employee or Independent Contractor Status
        • Financial Control
        • IRS Determination, Form SS-8
        • Misclassified Workers Can File Social Security Tax Form
        • Salespeople As Contractors
        • Sample Response to CO Unemployment Claim
        • Statutory Employee and NonEmployees
        • Tax Court's Checklist
        • Type of Relationship
      • LLC and S-Corps (superseded)

        • As a one-person show, should I still form an LLC? An S-Corp?
        • Automobiles and LLCs, S Corps (superseded)
        • Can I call my 1099 other income which avoids employment taxes?
        • Determining the S-Corp Payroll Amount
        • Estimated Tax Payments, Withholdings Issues for an S-Corp
        • How do I convert my LLC to an S-Corp?
        • How does an LLC or S-Corp's income affect my taxes?
        • If the S-Corp taxation is what I ultimately want, should I form an LLC or C-Corp?
        • Is there a way to avoid Self-Employment tax?
        • Should I convert my LLC to an S-Corp (Sub-S Election)?
        • Should I form an LLC with my spouse?
        • The S-Corp Grind, Operational Hassles
        • The Zero Dollar Paycheck
        • What are the operational hassles of an S-Corp LLC?
        • What is an Accountable Plan?
        • The Money Trail for S-Corp Elections
        • 185 Reasons NOT to S-Corp, Downsides to S-Corp Election
      • Can I call my 1099 other income which avoids employment taxes?
      • Can I deduct country club dues as a business expense?
      • Can I deduct internet expenses?
      • Can I deduct my cell phone charges?
      • Health Care Expenses, Premiums, HRAs, HSAs - Section 105
      • Hobby Versus Business Article
      • How can I avoid or reduce Self-Employment (SE) taxes?
      • If I am a self-employed ExPat, what taxes am I responsible for?
      • If my employer provides a cell phone, is that income?
      • LLCs and S-Corps
      • Retirement Planning within an S-Corp
      • S-Corp Hard Money Facts, Net Savings
      • Turn Your Vacation Into a Tax Write Off
      • What are tax issues with an LLC owning a rental property?
      • What are the rules on a home office deduction?
      • What business or corporate expenses can I deduct?
      • What do I do with a 1099-K?
      • What is the difference between a hobby and a business?
      • What is the difference between an LLC, S-Corp and a C-Corp?
      • Why can't I deduct health insurance premiums?
  • Archive

    • Articles coming soon
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  • Is there a way to avoid Self-Employment tax?
Print

Is there a way to avoid Self-Employment tax?

By Jason Watson (Google+)
Posted February 2, 2016

This KB article on self-employment taxes and S-Corp elections has been updated, and we have re-released our SubS.pdf tax article. Here are the links to get you started-

Comprehensive Guide to S-Corps in PDF (updated Fall of 2015)

Updated KB Summary Article on Avoiding Self Employment Taxes (updated July 15 2013)

Start of Comprehensive Guide to S-Corps in KB (first article of the series)

As a jumping off point for discussion, here are some numbers regarding avoiding self-employment taxes-

Income LLC SE Tax S Corp
Payroll Tax
Delta % Savings
 $30,000  $3,685  $2,295  $1,390 4.6%
 $50,000  $6,141  $3,825  $2,316 4.6%
 $75,000  $9,212  $5,738  $3,475 4.6%
 $100,000  $12,283  $7,650  $4,633 4.6%
 $150,000  $15,468  $11,475  $3,993 2.7%
 $200,000  $16,807  $15,300  $1,507 0.8%

Note– the savings could actually creep up to 6% or even 7% by having the S-Corp pay for your health insurance, health savings account or health reimbursement arrangement. Details to follow in our S-Corp tax article (see link above).

Please click on one of the links above to take you to the newly updated KB articles on reducing self-employment taxes and electing S-Corp status. Better freshen up that coffee.. or, if it’s after 5 o’clock, freshen up that adult beverage and read on!

Thanks!

—

A common complaint from those who own their own business is self-employment tax. Can you avoid it? Yes, to a large extent actually but it takes some effort.

If you own a business as a garden variety single-member (one owner) LLC, your business income will be reported on your personal tax return under Schedule C and is subject to self-employment tax (currently 15.3%) and income tax. The same is true for a business that has not formed a corporation. So, you could easily pay an average of 30% (15.3% + 15%) on all your net business income in Federal taxes. Wow!

An LLC that has multiple members (more than one owner) must file a corporate tax return on Form 1065. The income earned still flows onto your personal tax return and is subjected to self-employment taxes plus income taxes.

However, if you own an LLC and have elected to be treated as an S-Corp (Sub-S) for taxation, the business now files a corporate tax return on Form 1120S. What’s the big deal? you say.

The S-Corp election of your LLC changes how the K-1 is handled on your personal tax return. A K-1 is a statement that each owner receives, and it is similar to a W-2 since it reports the income that each owner is responsible for from a taxation perspective.

LLCs who file a corporate tax return without the S-Corp election generate a K-1 which commonly contains an amount in Box 14. This amount is the income subjected to self-employment tax. As a side note, an LLC that owns rental properties will generally not have an amount in Box 14 since rental income is passive, and not subjected to self-employment tax.

A K-1 generated from Form 1120S (LLC or C-Corp, either with the S-Corp election) flows onto the owner’s personal tax return on Schedule E. Schedule E is the form used for rental properties, royalties and other investment income including business income from an S-Corp LLC or an LLC which owns rental properties . Since the K-1 is generated from Form 1120S you only pay income tax on the business profits. That’s the good news. Here’s the not-as-good news-

An S-Corp LLC must prepare and file a corporate tax return on Form 1120S.  And, it must perform payroll and pay each owner a reasonable salary.  What is a reasonable salary?  Good question- each situation is uniquely different, and more discussion is generally required but a good jumping off point is about 50% of overall profits.  Also, remember that health benefits may be deemed compensation and contribute to “reasonable salary” tests.  More on salary in a bit.

Please contact us if you want to explore this further. In the meantime here are some things to think about-

Hard Money Facts
At $100,000 in net income an S-Corp LLC will generally save over $6,300 in overall taxes with the owners in a 15% ordinary income tax bracket, and over $15,500 at a 25% tax bracket. Please see the last page of our S-Corp tax article for a spreadsheet showing these examples. You can download it at-

wcginc.com/SubS.pdf

In creating the spreadsheet, we made a list of constants. Currently, self-employment tax is 15.3%, and FICA / Medicare for payroll taxes are combined to be 15.3%. Our tax preparation fee for a single member LLC is included with your personal tax return, so the amount is $0. Our flat rate tax preparation fee for most LLCs electing to be treated as an S-Corp for taxation purposes is $375. Please visit our website and click on Fee Structure to see our simple fees.

Our quarterly payroll service is $100. If you do not require any other payroll service except for yourself as the owner, quarterly salary payments is our suggestion. You can still take shareholder distributions as often as you like for monthly bills and expenses. We also perform a variety of payroll frequencies if your company needs it.

As you can see, $10,000 in profit is a relatively low break-even point. In other words, any amount of profit above $10,000 at an ordinary income tax rate of 15% will save you money if you elect the S-Corp taxation treatment of your business. Nice. What’s the catch?

Downside to S-Corp Election
Not everything that glitters is gold. There are a few manageable downsides to the S-Corp election. First, paying owners through payroll and filing a corporate tax return costs money- but with the example above, the savings will likely exceed the costs. And since the cost of payroll services and corporate tax return preparation is relatively fixed, the more profit you earn the more you’ll save. Something to discuss and consider.

Second, S-Corp shareholders are distributed profits as a percentage of ownership whereas garden variety LLCs use an operating agreement.  This can create headaches for silent partner situations and other non-traditional ownership structures.

Lastly, if you believe social security will remain funded by the time you retire, you might be short-changing yourself since your salary will be used to gauge future retirement benefits. Remember, owner distributions not subjected to self-employment taxes will not count towards your social security benefits basis. There are some other retirement hiccups that could affect your decision, and since they are very specific and detailed, more discussion is required. Keep in mind that the tax money you save today can make excellent retirement investments.

As a side note, it is NOT a good idea to make an S-Corp election on your LLC if it owns rental property. Rental property by definition is passive income (unless you are a real estate professional) and therefore not subject to self-employment tax. But if you run your rentals through an S-Corp LLC, you will be required to perform payroll which means you’ll be paying FICA and Medicare taxes which are the same as self-employment tax. Don’t do it.

Reasonable Salary, Payroll
This is the million dollar question. The IRS through Fact Sheet 2008-25 released a laundry list of factors used in determining a reasonable salary. It doesn’t offer a lot of help. A jumping off point is 50% of net profits. Keep in mind that other employee salaries, 401k contributions, putting your kids on the payroll, taking money out through expense reimbursements and paying down shareholder loans all go into the mix too. And if you are one-person show, all you need is quarterly payroll (4 per year- super simple).

Please read our tax article on the benefits of the S-Corp election including much more on reasonable salary, and how to reduce your company company profits without reducing your takehome money at-

wcginc.com/SubS.pdf

How Do I Convert My LLC to an S-Corp? Can I do it for 2012?
First you must be eligible- your corporation must be domestic, have 100 or fewer shareholders, have owners who are individuals, estates or exempt organizations, and have not have any resident alien shareholders. There some other devils in the details, but 99% of the LLCs out there qualify.

Second, Form 2553 (the S-Corp election form) must be filed with the IRS. It is typically due during the current tax year, however, there is relief for the late filing of Form 2553 and we can guide you through that. There is also a strong possibility that we can make the S-Corp election retroactive for 2012. It takes some effort. It requires some discussion.

Generally speaking, to obtain relief with a late S-Corp election, we prepare and file Form 1120S (corporate tax return) and attach Form 2553 to it. The S-Corp tax return cannot be accepted until Form 2553 is processed and approved. Of course we can take care of all this paperwork for you!

Costs
A corporate tax return for S-Corps on Form 1120S starts at $375 with a not-to-exceed fee of $775. The range depends on how much bookkeeping is required (help us help you). Having said that, most S-Corp tax returns are prepared for $375 which includes state, eFile and generating K-1s. Check out our Corporate Fee Structure at-

wcginc.com/images/pdf_up/FeeStructure-Corporate.pdf

As far as actually writing paychecks, we offer bookkeeping and payroll services. Depending on your state, we might kindly ask you to contact a third party provider such as SurePayroll (www.surepayroll.com). Here is a summary of our services and fees-

Quarterly Monthly
Bookkeeping Only $200 $100
Payroll Only $100 $75
Bookkeeping and Payroll $250 $150

These fees will cover most situations. However, depending on the number of transactions, accounts and employees, these fees might have to be adjusted.

Unless you have other employee, we suggest owners to pay a reasonable salary to themselves quarterly, for a total of four pay checks per year. This will coincide with your estimated tax payments on your K-1 income. Remember, you can write checks directly to yourself as often as necessary throughout the quarter. These are considered owner distributions.

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WCG Inc. | 2393 Flying Horse Club Drive, Colorado Springs, CO 80921 (formerly Watson CPA Group PLLC) | 719-387-9800 tel, 855-345-9700 fax, 719-345-2100 txt | WCG Inc. (License FRM.5000080) is supervised by Tina Denise Watson, CPA (License CPA.0022434) | XML Sitemap | Services Sitemap | Knowledge Base Sitemap

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