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Hi,
I really appreciate any feedback and help regarding this matter.
A client of mine is running an LLC as solo member. schedule C, last year he made
almost $130K and paid $13,500 for income tax.
He asked me if it is to his best of interest to convert to an S corp and how much would he save!
I know an LLC member has to pay SE tax on the whole income
but under S corp he only pays SE tax on the distributions after deducting the reasonable salary.
Assuming his salary was $80K per year.
I run the same numbers and created to scenario on pro connect to demonstrate the idea but i ended up with the same exact owed tax with is $13500!.
Why did not we see any difference in this case?
More over under Scorp the salary paid would have to deduct %15.3 on it.
Which means an LLC is much better in this case!
Any explanation would be highly appreciated!
Thanks
Best Answer Click here
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1) Distributions from an S Corp ARE NOT SUBJECT TO SE TAX
2) Reg Require a Reasonable Salary- Only salary is subject to normal FICA/MedCare + Co Match
3) A separate Corporate tax return would be filed - unlike a single member LLC which is ignored for tax reportin ( disregarded entity/ Files a Schedule C or if Rental Schedule E...etc)
4) your projections showed no change is because your assumption -"under S corp he only pays SE tax on the distributions after deducting the reasonable salary" is completely incorrect
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I know S corp do not pay SE on distribution and only pays it on the Salary .
- I have created 1120s and put all numbers and issued K-1 for the owner and also his salary.
- I also created his personal 1040 and included his Salaries as W-2 and his K-1 distribution form his S corp !
I got the same result as the LLC
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"...I got the same result as the LLC "
Then you've entered something incorrectly. There should be NO S/E tax showing on your "test" return. DID you factor in the deduction of payroll tax expenses at the Corp level?
Don't forget to factor in the legal costs of incorporating, the cost of doing the Corp return, the cost of payroll processing, INCLUDING determining what the reasonable compensation amount should be, and the taxes due at the Corp level to the State (if applicable - CA has an $ 800 minimum).
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Ignoring the bottom line income tax issues is a bigger issue - can he run the business like a sub S? I've seen too many cases here where folks never really make the break between running a schedule C and running a sub S. They keep running all of their personal crap through the business and never quite get the idea that if they take a check out of the business it really needs to be a payroll check instead of a "draw".
Slava Ukraini!
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The more I know the more I don’t know.
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Be sure to take advantage of the wonderful new tools offered by Intuit! https://accountants-community.intuit.com/articles/1756609
Answers are easy. Questions are hard!
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The Sched C filer has a Sched SE, which already takes into account a declining value for half of the SE, which reduces the business Expense, which reduces the half of the SE, which reduces the business Expense, which reduces the half of the SE, etc. That's why your Math comes out mostly the same.
All you did is shift some income from Sched C to W2.
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