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welcome to home biz tax talk my name is lissandra Everett I am the home biz Tax lady where I have home business owners win the tax game home biz tax talk airs Monday through Friday nine o'clock dish and we turn into my show you got to hear about topics that are important to the home business community so today I want to focus on multi member LLC's being taxed as s corpse and the reason I got here is because I had someone ask when is a good time for a partnership to be taxed as an escort so there's still some confusion about these different types of business entities what you can do and what you can't do okay so with the multi-member LLC again with the LLC's they are called they are disregarded entities which means that you might have your LLC but as for tax purposes you're either going to be taxed as a sole proprietor a partnership in S Corp or a C Corp that's it okay so a single-member LLC is taxed as a sole proprietor a multi-member LLC is taxed as a partnership and then you can elect to be taxed as an S corp or C Corp okay but now when you're talking about making elections when you're talking about making a shift when you form a partnership you are just that a partnership and then but when you have a multi-member LLC that is although it's treated like a you know for tax purposes like a partnership is still an LLC and then you can make elections from there all right but there are things that you got to think about before you go and make this shift all right so with a multi-member LLC you can have both citizens and non-citizens as members of your LLC non-us citizens but when you elect S Corp remember when you make an election to be taxed as a different entity you have to follow those rules okay so with a with an S Corp you can only have a hundred members and they have to be US citizens okay so if you start a multi-member LLC and then you want to become an S Corp the first question you have to ask is how many members do we have here if you have 100 members and you want to be an escort then you're gonna have to get rid of somebody okay that's just the way it is but that doesn't mean that you can't have your LLC tax as a c-corp because the C Corp does not have those limitations but an S corp does all right so if you're a multi-member LLC and you have more than 100 members you need to and you want to use you're saying okay we want to be an S corp then somebody's got to go alright in an S corp though husband and wife are considered one member so that's different from a multi-member LLC depending on the state where you reside okay because even you know with community property states that can get interesting as well okay I told y'all that's why you don't go do this all willy-nilly that's why you go and schedule a consult anywho so with the but with it the multi-member LLC again we're talking about you have to be US citizens so if you have a member of an LLC who is married to a resident alien that is not you we're talking about a non-us citizen then you can't be an escort because that husband and wife are considered one one member so you're either going to make that person a citizen or you're gonna have to be a c-corp see it ain't that simple tojon all right then we're talking about then you know you look at how you get paid so in a multi-member LLC again treated like a partnership partners are not w-2 employees of the business partners get paid by what's called guaranteed payments and then get distributions on everything else but when you become an S corp if you are an S corp owner you are you have to be on w-2 you have to get paid a reasonable salary so that at that point you go from guarantee payments to reasonable salary w2 you know paying employment tax all that that goes with an S corp okay so again not something that you take lightly and so you have to you know so you then you have to go back to those guaranteed payments and say Oh okay is this how much we're gonna pay each partner on each shareholder that's you know active shareholder owner of the business is this how much we're gonna pay that person and then who's gonna handle the payroll and bookkeeping now if you already are in a partnership and you don't have payroll and bookkeeping together you are already starting off on the wrong foot when it gets down to partnerships you really have to track ownership you have to track basis those are important things you know balance sheets all those things have to be tracked as a partnership and if you don't have that together on that level then go into an S corp isn't going to make any difference for you like that is that's a tragedy waiting to happen okay because you still have to have those things in place so it for me number one before you go making any elections of any sort whatsoever you need to make sure you have your accounting and bookkeeping in place and it's structured so that when you do make that shift then you have the information available to make that switch okay so again you know even though like I said filing the form to make the election is easy peasy lemon squeezy it is the administrative part where people tend to fail and they tend to fail because they don't know the rules this is why you know again people people will let you do whatever you want to do you can go on all these sites and do whatever you want to do that's their job you say you want to form this this multi-member LLC suite you say that you want to you know you send in the form to the IRS to make this election suite everybody assumes that you know what you're supposed to do when you go do this stuff yourself and ignorant to the law generally is not an excuse for not following the law because the first thing they're gonna ask you is who did you talk to you all right and it's not that you just went on Google and said oh well I can just make this election and everything's everything's great no this is why you have to consult with people and I keep I keep hammering at home because people want to like we're in this DIY type of society where oh I don't want to pay so-and-so that amount of money to do this when I can do it myself nobody said you couldn't do it yourself but what we're saying is if you don't know the rules you're gonna do yourself more harm than good because when you get caught and have to pay the penalties for the information that you don't know like we said before ignorance is one of the most expensive things you can have in business it is better for you to invest in a consultation upfront before you go and make these changes in your business because the getting out process isn't as easy as you know just getting in getting in is easy getting out that might be something else completely different because again even though you may be looking at okay well I want to make this multi-member LLC an S Corp if you've got a non-us citizen or have you got more than 100 members then you're gonna be AC Corp which is a completely different animal so yeah so you know this is business structures are are great when they're used properly but if you make a shift in a business structure before you are financially ready before you are administratively ready that is go
Thanks for your comment Eda Menousek, have a nice day.
- Dotty Shishido, Staff Member
hey business warriors welcome to the show I do have to apologize that there is a big concrete mixer truck parked outside today and I don't know if you're gonna be able to hear it in the audio I've waited for several hours and it hasn't moved so we're just gonna start recording and today we are gonna be talking about how to save even more taxes with your small business and it's about basically converting your business structure to escort okay from LLC partnership taxation to escort taxation so let's kind of start from the beginning and let's explain how it works with an LLC so if you're a multiple member LLC generally you will be taxed by default text as a partnership and that's you know that's the way it works here in New Jersey your state might be different you'll have to check that out and with LLC income it's what they call a pass-through business so the LLC itself is not taxed but the income passes through onto your personal tax return and is taxed personal rates and you know if the business has two members and their each have a 50% share 50% of the profit goes to each of them and it's taxed at their personal rates on their personal tax returns the pros of LLC's are you have a limited liability and then you can also have deductions okay so like any money you spend for your business that eats into your profits can be deducted and then you don't have to pay tax on that money for example the rent I pay on this office here which is a really crappy deal because like I said concrete mixer trucks are parked right outside I've got to change it soon but anyway that money is a tax deduction so I'm not taxed on that money I'm only taxed on my profit so that goes through on to my personal tax return and then I'm taxed but the disadvantage of the LLC structure is that you become liable for self-employment taxes this is sometimes known as FICA taxes and it includes Social Security Medicare a few things like that there's a few different components to it but it works out at about fifteen point three percent now when someone is an employee and they work for another company they pay half of that okay they pay seven point six five percent out of their salary so that's why you see on your pay stub there'll be like Social Security tax withheld etc a few little things like that small amounts that's basically seven point six five percent of your salary and well we just said it's fifteen percent right for self-employed that's because when you're an employee your company the company you work for pays the other half the other half of that fifteen point three percent so let's say your salary is a hundred thousand dollars a year and we're just using that level because it's it's one hundred okay so it's easy to you know say percentages in relation to the salary you're gonna end up paying seven thousand and six hundred and fifty and your company on top of your hundred thousand salary will pay seven thousand six hundred fifty so it actually costs the company one hundred and seven thousand six hundred fifty dollars to employ you okay it doesn't just cost them one hundred thousand dollars but the problem is when you're self-employed there's no employee picking up the tab for that extra seven point six five percent so you or your LLC or whatever ends up having to pay the full fifteen percent okay fifteen point three percent so it really can be quite a lot for self-employed people that is where the beauty of the escort comes in okay now escort we don't recommend switching to escort right away okay because there are a few things about escort that you need to know and the main thing is that you need to pay yourself a set salary and then you can also pay yourself a share of profits or you know a dividend on your shares in the business on top of that okay now the advantage of this is the salary you pay yourself you have to pay that fifteen percent on okay just like normal normal LLC or normal employee whatever you have to pay those FICA taxes so it's just Korea etc but the dividend that you pay yourself you do not have to pay any of that fifteen percent okay so you just pay federal and state income taxes if your state has an income tax some states don't but yeah you just pay income taxes on it you do not have to pay the Social Security Medicare part on the dividend part of your income so let's give an example the IRS says that you have to have a re simple income okay so you have to pay yourself a reasonable income thus your company needs to be making a certain amount of money all right because if you pay yourself say ten thousand dollars a year and then you take fifty thousand dollars as a dividend that's not a reasonable income okay they they'll see that as you gaming the system if you get audited it's gonna be very bad and it'll increase your chances of getting audited because it'll be like hey this guy's paying himself tendo ten thousand a year but he's getting like 50 grand in dividends I think he's playing the system so this is why we only really recommend this once your business starts get a little bit bigger okay a reasonable income the IRS actually doesn't have any definition of what a reasonable income is okay so it's kind of down to you to decide I met with my CPA yesterday my accountant because we're actually thinking of changing to escort well not thinking of it we are gonna do it and we're preparing it now we're gonna change to escort as of January 2019 and we're gonna use escort structure for our business next year because of the tax advantages I asked my CPA what a reasonable income is and she replied to me well you've got a look at the industry look at other you know jobs in that industry manager of a small media company because that's what our company does generations Media LLC and then you've also got a look at does the income you're paying yourself cover your expenses okay your living expenses basic living expenses like rent electricity bills any like child care you pay for your groceries shopping all those sort of basic living expenses if your salary that you're paying yourself covers those basic living expenses then that should be okay and then say extra money like going on a luxury vacation once a year or investing money in the stock market saving up money to buy a house that could come from your dividend okay because that's kind of like extra but the basic living expenses has to be covered by your your income that's what they the CPA recommended in order to kind of appear that that income is reasonable alright so I asked her if we earn $100,000 each a year how much of that would we pay as an income and she recommended 50% so pay yourself $50,000 as income and $50,000 as a dividend on that $50,000 salary income you're gonna have to pay the 15% in FICA taxes okay but on the dividend part you do not have to pay that what's 15% of 50,000 it's $7,000 so operating as an S corp is gonna save you roughly and I'm kind of simplifying it here rounding the figures and stuff but it'll save you roughly 7,000 dollars a year if you're taking $100,000 in income half of it as a fixed salary and the other half as dividends okay so that's basically the S corp stru
Thanks gitana007N your participation is very much appreciated
- Dotty Shishido
About the author
I've studied argentine history at Martin University in Indianapolis and I am an expert in chemical biology. I usually feel enthralled. My previous job was industrial machinery mechanics I held this position for 19 years, I love talking about volleyball and mountain climbing. Huge fan of Halle Berry I practice snowboarding and collect coca-cola.
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