S Corp Versus LLC

By Jason Watson, CPA
Posted Wednesday, October 18, 2023

The next pay per view! UFC #58,723, The Apology… S Corp Versus LLC… Sunday Sunday Sunday!

Since this book is about LLCs and S Corps and we’ve already discussed a ton of stuff, we put together a small table to illustrate the S Corp vs LLC contrasts and comparisons; sounds like the start of a college essay. Yuck. Here we go-

	LLC	S Corp
Self-Employment Taxes	Yes	No
Section 199A Deduction Ability	Max*	Max
Business Tax Deductions	Max	Max
401k Plan	Yes	Yes
Liability Protection	Limited	Limited
Tax Return	1040 / 1065	1120S
Headaches	Yes	Yes

Quiz time! What’s the difference between an LLC and an S Corp? None, except the reduction of self-employment taxes and the tax return form number. That’s it! Ok, perhaps that is not entirely true.

The little asterisk above is referencing a phaseout of the Section 199A qualified business income deduction where a secondary test is used to determine (or limit) the deduction. Basically, it is 50% of the business income (profit) or 20% of the wages paid, whichever is lower. Since it is frowned upon for a non-S Corp’d LLC to pay wages to its owner(s), at times an S Corp election is required to “open up” the Section 199A deduction.

There are two additional burdens when exploring the LLC vs S Corp comparison.

One is tax return preparation, and subsequent fee. A Form 1120S is a business entity tax return and WCG’s fee is typically $1,500 to $1,800. The second burden is payroll processing; as an S corporation you must pay the shareholders a reasonable salary as employees. This too adds a financial burden as well as a series of administrative “touches.” But! As you will see, the savings can be significant. For a small increase in chores, you could easily save thousands of dollars. Yes, plural.