LLC taxed as c corp election [Glossary]

Last updated : Sept 7, 2022
Written by : Nena Nordhoff
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LLC taxed as c corp election

What is the best tax classification for an LLC?

The best tax classification for an LLC depends on whether you want your business profits to be taxed at your personal income tax rate, or at the corporate tax rate. If you'd prefer personal tax rates, you can classify it as a disregarded entity or as a partnership. Otherwise, you can classify it as a corporation.

How can C Corps avoid double taxation?

Retain earnings: If the corporation doesn't distribute earnings as dividends to shareholders, earnings are only taxed once, at the corporate rate. Pay salaries instead of dividends: Shareholders who work for the corporation may be paid higher salaries instead of dividends.

Is an LLC an S or C corporation?

An LLC is a legal entity only and must choose to pay tax either as an S Corp, C Corp, Partnership, or Sole Proprietorship. Therefore, for tax purposes, an LLC can be an S Corp, so there is really no difference.

How does an LLC avoid paying taxes?

A general Corporation making a Subchapter “S” Election or an LLC with or without a Subchapter S Election pays no federal tax on its taxable income and no employment taxes on its distributions to stockholders.

Why are C Corps double taxed?

This means a C corporation pays corporate income tax on its income, after offsetting income with losses, deductions, and credits. A corporation pays its shareholders dividends from its after-tax income. The shareholders then pay personal income taxes on the dividends. This is the often-mentioned “double taxation”.

Is LLC income taxed twice?

Your LLC profits are taxed at your individual income tax rates—just like when your LLC is taxed like a sole proprietorship. No double taxation and you can qualify for the pass-through deduction.

What is the C Corp tax rate for 2022?

2022 Tax Year For tax years beginning after 12/31/17, the "C" corporation Federal tax rate is a flat 21%. Owners of business entities, which are not taxed as “C” corporations, are eligible for a 20% Qualified Business Income (QBI) deduction.

Should my LLC be taxed as an S Corp?

Although being taxed like an S corporation is probably chosen the least often by small business owners, it is an option. For some LLCs and their owners, this can actually provide a tax savings, particularly if the LLC operates an active trade or business and the payroll taxes on the owner or owners is high.

Which is better for taxes LLC or S Corp?

LLCs. As an LLC owner, you'll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company. However, itemized deductions could make an LLC a more lucrative choice for tax purposes.

What is difference between LLC C and S Corp?

Difference Between C Corp vs S Corp C corporations pay tax on their income, plus you pay tax on whatever income you receive as an owner or employee. An S corporation doesn't pay tax. Instead, you and the other owners report the company revenue as personal income.

What is the downside of an LLC?

Disadvantages of creating an LLC Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Check with your Secretary of State's office.

What is the tax advantage of an LLC?

LLCs avoid double taxation while enjoying personal liability protection. Unlike a corporation that pays taxes twice on the same profit, first as business income and then again as owner income, LLC shareholders are only taxed once on profits in their personal income.

How can I avoid $800 franchise tax?

The only way to avoid the annual $800 California franchise fee is to dissolve your company, file a 'final' income tax return with the FTB and to submit the necessary paperwork.

Are C corps taxed on revenue or profit?

C Corporations pay corporate taxes on earnings before distributing their profits to the shareholders in the form of dividends. Individual shareholders are then subject to personal income taxes on the dividends they receive.

What is the current C corp tax rate?

A C-corp simply applies the corporate tax rate of 21% to its taxable income.

How do C corporations reduce taxes?

C-corporations can deduct charitable donations up to 10% of their taxable income. If they do donate more than the eligible amount, they can carry over the deductions for the next five years. Not only do organizations receive a tax deduction, but they can also receive social good will.

How does an LLC avoid self employment tax?

By separating the income earned by the corporation into two separate methods of payment to you as the individual, you avoid self-employment tax on funds paid as a distribution. Note that you have to elect to be taxed as an S corporation for this to apply.

How much can an LLC write off?

If you have $50,000 or less in startup costs and are in your first year of business, the IRS allows you to deduct $5,000 in startup costs and $5,000 in organization costs from your taxes. If your startup expenses exceed $50,000, the total deduction will be reduced by however much your expenses exceed $50,000.

Can IRS come after an LLC for personal taxes?

While the IRS can't levy your business account for your personal back taxes, the IRS can freeze and seize your company's assets to satisfy your tax debt if your business has a sizable tax liability. In most cases, for the IRS to implement a levy, your business must have: A substantial amount in back taxes.

What expenses are tax-deductible for C Corp?

  • Salaries or wages.
  • Health care benefits.
  • Retirement contributions to a 401(k), IRA, or another plan.
  • Training expenses.
  • Payments to independent contractors.
  • Vacation and sick pay.
  • Disability benefits.
  • Education expenses, such as college tuition for employees.

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LLC taxed as c corp election

Comment by Houston Lawbaugh

is your business protected against the threat of malicious litigation and frivolous lawsuits are you sinking company profits into marketing campaigns to do nothing to contribute to the growth of your business bottle business sentence provides practical business perspectives that uniquely emphasize both legal and media marketing strategies to protect and ensure the longevity of your business and whether you're trying to provide a startup business with some level of stability or an established business with foolproof asset and estate protection or simply attempting to get a better return for your business marketing dollars bill Barnard and Rick Moscoso will expose potential pitfalls to ensure the security and growth of your business free from unwanted expense and the threat of litigation you'll learn how to implement marketing and protection tools equal to those used by today's most successful corporations let's join Bill and Rick for today's Bothell business sense show good morning everyone now welcome to today's episode of the bottle business sense show I'm Rick Moscoso with my co-host Bill Barnard on the other side and today we have an interesting show where we're going to talk about or ask the question should your LLC elect S Corp status and so we have an excellent expert on the other side who's going to talk about this topic so let's let's bring them onto this episode mr. bill Barnard thanks Rick good to see you good to see you everybody I'm glad you're with us today Rick mentioned that we have an expert with us and what he's referring to me but I want to want to also add a disclaimer that what I'm going to talk about today is important from a business and a taxation standpoint that you should coordinate what I say today with your tax accountant very very very important and you'll see why as we we go through the show you know Rick I thought I'd start out by saying business owners often struggle between whether to choose an LLC or an S corporation and the two really aren't that mutually exclusive and by that I mean it's possible to form an LLC but then elect S corporation status what do I mean by that let's go let's talk about some of the similarities and key differences between the two and that'll help you get a foundation for what I mean we're talking about a strategy concerning payroll taxes and employment taxes if you have an LLC payroll taxes and employee complete absence of limit taxes are going to be very very critical and I'll show you what I mean unlike a regular C corporation both an LLC and an S corporation do not pay taxes on business profits they only pay they only pay actions through the income tax returns filed by the business owners in other words they're passed through taxable entities so you file a return your accountant does on your behalf for your business whether it's an LLC or an S corporation and you pay the state secretary of state the fee a yearly fee for that which is the same every year but you don't pay any taxes until you file your individual tax return because the profits you make from your LLC or your S corporation flow through or pass through your individual tax return and that's when you pay your taxes so having said that both structures are passed through taxable entities and the second big important similarity is both structures new what we're going to test you at see if you remember all the important things never talked about what's the key of having a business entity what's the big key of having a business entity why do you want one well the one that comes to mind is protecting their personal assets yes see that's it that's the second big key similarity between an LLC and an S corporation you protect your personal assets again assuming you're you you don't have a pseudo entity you're not committing fraud and various other things that we've talked about in other shows concerning business entities specifically however there's some key differences between the LLC and the S corporation usually the LLC is a big advantage for small business owners who don't want to be what burden by paperwork because the S corporation has a lot of specific paperwork and annual meetings and organizational notes that you have to keep during the course of the year the other thing is the LLC offers more flexibility 's and how how owners can allocate the percentage of their profits and losses this is real important follow me on this now this is really important the LLC offers flexibility let's say you start a business with a friend and you each own 50 let's say you and I started leaving this Rick and I own 50% and you own 50% but something comes up in your personal life you spill coffee all over yourself and you've now got hot coffee stains and burns all over you've got to be rushed to the ambulance by the ambulance or the hospital and you can't work I'm having to do most of the work and I'm saying this folks because before the show today Rick stole coffee all over himself so but uh we are business partners hypothetically so all of a sudden you can't do most of the work I have to do it you decide and we decide that the fair thing to do is to pay me 75% of that year's profits and you only get 25% because I did most of the work we can do that with an LLC however with an S corporation we own 50% of that corporation so regardless of me doing most of the work you get 50% of the profits and I get 50% of the profits even though you're laying in a hospital somewhere you know I'm getting high on the opioids or whatever it is and you're collecting all this all this money right so that's the real big classic plus for an LLC remember that certain businesses can't be LLC's like lawyers like myself that's again the topic of a different show but if you're if you're if you're a business owner and you can choose between an LLC and a corporation that's one of the things that LLC allows you to do that a corporation would never allow you to do how about the key advantage that an S corporation has with taxes because that's really what we're talking about in this show the S corporation gives you more flexibility with regard to taxation so if you have this big flexibility I just talked about with an LLC in terms of allocating profits and you have this big tax advantage with an S corporation which I'm going to explain in a minute when you have the best of both worlds if you formed an LLC but you chose to be taxed as an S corporation sure sure but how does that work well the S corporation gives you flexibility in this way for example let's say you're have an LLC now all of your earnings are passed along in the form of self-employment income and therefore when you make your profits on your LLC you're getting taxed on Social Security and Medicare ok you're getting taxed in the form of self-employment income and Social Security and Medicare all of the taxes the payroll taxes that come out of your taxes at the end of the year if you have an S corporation though you have the option of dividing up earnings in terms of wages and salary and then passive income in the form of distributions so only wages and salary that you take out are subject to the FIC

Thanks for your comment Houston Lawbaugh, have a nice day.
- Nena Nordhoff, Staff Member

Comment by antiGsm

in this video i'm going to discuss four scenarios in which you do not want your business to be taxed as an s-corporation that's right you heard me right i said not be taxed as an s-corporation there's so many videos out there promoting the s-corporation and why it's so great and it is it can save you a lot of money in self-employment taxes but you must also know what the drawbacks are it doesn't fit every single business owner out there so i'm going to touch on the following four scenarios one is how much profit should you be earning in your business before it makes financial sense to have your business taxed as an s corporation the second one would be how large amounts of w income sorry w-2 income rather can negate the tax savings of an s-corporation so by w-2 income i mean you are employed by an employer and actually like have a job that you earn money at what happens when your state that you live in does not recognize the s corporation or perhaps they tax the s corporation and lastly why passive income such as buy and hold rental real estate should not be taxed as an s corporation so if this is your first time watching my name is navi mirage i'm a cpa who helps real estate professionals that's real estate agents and realtors and brokers across the country save thousands of dollars in taxes but um that said if you are a regular business owner and you don't deal with real estate stick around because this bus this video is going to apply to all small businesses um let me just lay that lay the foundation for you a moment uh we're talking about when the s corporation may not make financial sense right and so before watching this video some of you may want to brush up on the different differences between what a sole proprietor is an llc an s corp and a c corporation and i have another video on that topic so if you're not quite understanding what i mean by an s corp or how an llc is taxed as an s corp or a corporation a c corporation that is can be taxed as an s corporation you might want to watch those videos first and i'll link them either in the description or somewhere else depending on where you're watching this video as a refresher though from some of those videos and me diving deeper into the s corporation remember that the profit from your business is subject to two different types of tax right so the profit from your business is subject to self-employment taxes and it's subject to income taxes both both at the federal and state level okay self-employment taxes are another way of saying social security and medicare taxes okay the s corp strategy is all about saving money in self-employment taxes it doesn't have anything to do really with the federal income tax or the state income tax so whenever you hear s-corp understand that it's a strategy related to saving money in self-employment taxes and not so much federal income taxes or state income taxes recall that self-employment taxes are paid at a rate of 15.3 percent on the profit of your business so let's say you have a very profitable business that has a hundred thousand dollars in profit you're gonna pay self-employment taxes of fifteen thousand three hundred dollars if you're taxed as a sole proprietor and not taxed as an s corporation okay so now that you have that knowledge or that foundation let's talk about the reasons why you should not be taxed as an s corporation so i'm just going to hit the highlights here in this video uh my plan is to create subsequent videos that dive into these topics in greater detail so be sure to subscribe so you don't miss those videos because i think understanding the why is just as important of understanding these sort of statements that i'm making so how much profit should you be earning in your business before baking uh the s corp election and in my view sort of the general is 40 000 and i'm defining profit here as revenue minus your expenses right so some of you earn your revenue by selling products others of you earn revenue by selling services right so either way i'm defining as profit as the income that you earn the revenue that you earn minus all your tax deductible expenses so um the reason for the forty thousand dollar figure and why i think that's sort of the um generic amount of profit you should make before making the s corp election is because of the additional cost associated with an s corporation so you're going to have uh tax preparation fees because the s corporation is a separate tax return than that of an individual uh that's taxed as a sole proprietorship let me say that one more time or a little bit differently when you have an s corp you have to fill out or file a s-corporation tax return which is different than when you were perhaps an llc tax as a sole proprietor or perhaps you didn't form an llc and you're just tacked to the sole proprietor there's now two separate tax documents that need to be filed and so cpa is going to charge you money to do that for you right also when you're in s corp you're going to need to take a quote-unquote reasonable salary per the irs there's a lot of paperwork that has to deal with paying yourself and so you'll likely hire a payroll service to perform that for you and also there's the annual maintenance of an s corporation or perhaps the annual reporting of an llc that's taxed as an s corporation or the annual reporting of a c corporation that's then taxed as an s corporation all of these are fees involved in having an s corp right and so basically you know it's cost benefit analysis so you want to make sure that these fees don't outweigh your tax savings and i have found that it's usually around the 40 000 mark where it makes sense to make that s corp election but you know it's not a one-size-fits-all answer and you should consult with your cpa or perhaps myself to make sure that it's right for you the second reason why you may not want to be taxed as an s-corporation is when you have high w-2 wages so if you are an employee at a company and also have um a small business right so you you work state of nine to five and you also have a side hustle where you might sell on amazon or you sell real estate on the side if your rate if your wages already exceed what's called the wage base which in 2020 is currently 137 700 that means your income has already hit the cap for social security taxes so the s corp strategy is not going to save you any money as a matter of fact you'll actually lose money if you elect the s corporation status for that business because your s corp will pay for the employer portion of social security and medicare taxes unnecessarily because if you're taxed as a sole proprietor you wouldn't have any of those additional payroll costs associated with the s corp and i i get it that you may not understand the details of what i'm saying here the important thing to note is that if your salary is a you know 137 000 at your day job or higher and you're also have a side hustle you might not want to be an s corp okay um again the details will be discussed in another video um there's still an opportunity for the s corp to make sense when your base wages are that high but instead of

Thanks antiGsm your participation is very much appreciated
- Nena Nordhoff

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