In an LLC you get charged Self Employment (SE) taxes (which are 15.3%) above and beyond your normal individual tax rate. LLC's are really flexible and you can do a lot with them. I myself have an LLC and they way you can limit the SE tax is by having you and your spouse (if you have one) in the LLC. This makes it so your spouses portion (whatever percentage of ownership you give him/her) not subject to SE taxes because he/she is not active in the business.
S-Corps is a really good entity in that S-Corps are the only entity not to get charged SE tax. However, you need to pay yourself a reasonable (per the IRS) wage. Thus, in your wage you end up paying self-employment taxes (7.65% withheld from your paycheck, and the 7.65% matched by your company = 15.3%), but it can be a lot less than if you were in a partnership/LLC where all of the income you earned was subject to SE taxes.
Please note that both LLC's and S-Corps are flow-through entities and do not pay tax by themselves. The income flows-through to your personal return and you are taxed on an individual basis for that money earned.
Both entities give you personal liability protection
Submitted by Affiliate911 on Wed, 05/07/2008 - 18:48.
Jon would you recommend this?...
*For those who prefer the tax treatment of an S corp but like the simplicity of an LLC, there is an alternative worth considering: Forming an LLC that is taxed as an S corp. An LLC may make a special election with the IRS to be taxed as an S corp. This election is made on IRS Form 2553 and must be filed with the IRS before the 16th day of the third month of the tax year in which the election is to take effect.
An LLC that is taxed as an S corp is still a limited liability company from a legal standpoint (subject to the laws governing limited liability companies in the state of formation); however, for tax purposes it is treated as an S corp.
A word of caution: Certain nuances of S corp taxation can be confusing to some LLC owners, especially do-it-yourselfers and/or those who prepare their own tax returns; for example, an LLC owner might easily make the mistake of referring to an IRS publication that addresses LLCs when, in fact, such a publication would not apply to an LLC that is taxed as an S corp--and such an error could lead to negative tax consequences. It is therefore highly recommended that you consult a CPA or other qualified tax professional for advice and/or assistance.
This is quite a good article on this subject ---> http://tinyurl.com/2lbpm2
If you want to learn a thing or two about corporations, LLC's and taxes you should get the following book:
Lower Your Taxes - Big Time! 2007-2008 Edition (Lower Your Taxes Big Time) (Paperback)
by Sandy Botkin
It's available at Amazon. The author is both a lawyer and accountant and he quotes the tax law to the T.
Great advice
I'll have Jon chime in on this too.
In an LLC you get charged Self Employment (SE) taxes (which are 15.3%) above and beyond your normal individual tax rate. LLC's are really flexible and you can do a lot with them. I myself have an LLC and they way you can limit the SE tax is by having you and your spouse (if you have one) in the LLC. This makes it so your spouses portion (whatever percentage of ownership you give him/her) not subject to SE taxes because he/she is not active in the business.
S-Corps is a really good entity in that S-Corps are the only entity not to get charged SE tax. However, you need to pay yourself a reasonable (per the IRS) wage. Thus, in your wage you end up paying self-employment taxes (7.65% withheld from your paycheck, and the 7.65% matched by your company = 15.3%), but it can be a lot less than if you were in a partnership/LLC where all of the income you earned was subject to SE taxes.
Please note that both LLC's and S-Corps are flow-through entities and do not pay tax by themselves. The income flows-through to your personal return and you are taxed on an individual basis for that money earned.
Both entities give you personal liability protection
I hope this sheds some more light on the subject.
So if you were single and didn't have someone else to put int the LLC, would you still use an LLC or would you then choose and S-Corp?
Here is more info about me if it helps:
I'm single
I live in California
Also, you mentioned that with an LLC you get SE Taxed on everything, why not an S-Corp then?
Jon would you recommend this?...
*For those who prefer the tax treatment of an S corp but like the simplicity of an LLC, there is an alternative worth considering: Forming an LLC that is taxed as an S corp. An LLC may make a special election with the IRS to be taxed as an S corp. This election is made on IRS Form 2553 and must be filed with the IRS before the 16th day of the third month of the tax year in which the election is to take effect.
An LLC that is taxed as an S corp is still a limited liability company from a legal standpoint (subject to the laws governing limited liability companies in the state of formation); however, for tax purposes it is treated as an S corp.
A word of caution: Certain nuances of S corp taxation can be confusing to some LLC owners, especially do-it-yourselfers and/or those who prepare their own tax returns; for example, an LLC owner might easily make the mistake of referring to an IRS publication that addresses LLCs when, in fact, such a publication would not apply to an LLC that is taxed as an S corp--and such an error could lead to negative tax consequences. It is therefore highly recommended that you consult a CPA or other qualified tax professional for advice and/or assistance.
Affiliate911 see my post here that explains exactly what you have asked:
http://www.quityourdayjob.com/node/1733
Best,
Jon Shaw
Sweet.
Thanks Jon...at what income level would you want to be at, before considering filing form 8832 or form 2553?
Affiliate911,
See the following post on ideas on when to change to an S-Corp from an LLC.
http://www.quityourdayjob.com/node/1978
Best,
Jon