LLC taxed as s corp election [Beginner's Guide]

Last updated : Sept 4, 2022

Should I have my LLC 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.

Is LLC taxed as S corp same as S corp?

Both an LLC and S-Corp can be taxed at the personal income tax level. LLCs are often taxed using personal rates, but some LLC owners choose to be taxed as a separate entity with its own federal ID number. S corporation owners must be paid a salary in which they pay Social Security and Medicare taxes.

Can an LLP elect to be taxed as an S corp?

LLPs are always taxed as a pass-through entity and do not have the option of electing S Corporation taxation.

What happens when you convert an LLC to an S corp?

An LLC can also elect to be taxed as an S corporation, even if it only has one owner. Electing S corp. taxation doesn't convert your business structure from an LLC to a corporation. It simply changes the way you file and pay taxes and handle owner income.

Why would LLC choose to be taxed as corporation?

The main advantage of having an LLC taxed as a corporation is that the owner doesn't have to take all of the business income on their personal tax return. They also don't have to pay self-employment tax on their income as an owner of the corporation. The main disadvantage is double taxation.

When should I convert from LLC to S Corp?

The right time to convert your LLC to S-Corp From a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.

Should a single-member LLC file as an S Corp?

It is beneficial for an LLC to elect S corp status if it is profitable and its owners are required to pay large amounts of self-employment taxes, such as Social Security and Medicare taxes. As the owner of a single-member LLC with S corp status, you are not regarded as a self-employed person.

What is the best tax structure for LLC?

As a simple and effective tax structure, many multi-member LLCs will find the partnership tax status to be an ideal choice. However, if your company plans to seek funding from outside investors or other types of passive owners, you may want to consider being taxed as a corporation.

How do I know if my LLC is an S Corp or C Corp?

You'll find your corporation classification on your business returns. You can review previously filed tax returns or ask your accountant to review the returns. All corporations must file an annual income tax return. C corporations file IRS Form 1120 and S corporations file Form 1120S.

Can LLC be member of S corp?

If an LLC is a single-member LLC that hasn't elected to be taxed as a corporation, and if the owner of that single-member LLC is eligible under the strict requirements for ownership of an S corp, then that single-member LLC can have an ownership interest in an S corp.

How are S corp elections taxed?

In order to become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders. See the Instructions for Form 2553PDF for all required information and to determine where to file the form.

Can a LLP own an S corp?

LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners). Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders. S corporations cannot be owned by corporations, LLCs, partnerships or many trusts.

Do I need a new EIN If I convert to an S corp?

You will be required to obtain a new EIN if any of the following statements are true. A new LLC with more than one owner (Multi-member LLC) is formed under state law. A new LLC with one owner (Single Member LLC) is formed under state law and chooses to be taxed as a corporation or an S corporation.

Can you retroactively elect S corp status?

If an LLC or corporation demonstrates it has reasonable cause for not filing Form 2553 on time, the IRS may approve the S Corp election retroactively to the beginning of the company's tax year.

How do I transfer assets from LLC to S corp?

Converting from LLC to S-corp in terms of taxation can be done using Form 8832. By filing Form 8832 with the IRS, you elect to have your LLC taxed as an S-corporation rather than as an LLC.

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.

What is the difference between a single-member LLC and an S-Corp?

So the main difference is with a single-member LLC, only the business owner can report business profit/loss on their personal taxes, whereas in an S-Corp, all shareholders can. When starting a small business, many entrepreneurs end up deciding between two types of business entities—LLC vs. S-corp.

Does an LLC have to file 8832 before 2553?

As discussed earlier, it is not necessary to file both Form 8832 for a newly formed entity to elect to be treated as an association taxed as a corporation and Form 2553 to elect S corporation status. Instead, a single election can be made on Form 2553.

Is there a way to check to see if an LLC is elected as an S corp with IRS online?

You can check your S corp status relatively easily by contacting the IRS. If you have properly submitted your S corporation form to the IRS and have not heard back, you can call the IRS at (800) 829-4933 and they will inform you of your application status.

What are the benefits of having an S corp?

• Protected assets. An S corporation protects the personal assets of its shareholders.
• Pass-through taxation.
• Tax-favorable characterization of income.
• Straightforward transfer of ownership.
• Cash method of accounting.
• Heightened credibility.

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in this episode i'm going to talk about s corporation through this video you may discover that an s corporation election is right for you you could possibly save a lot of money if you decide to elect your business as an s corporation so you probably clicked on this video because you are in the process of starting your business hello everyone i'm andrew from malai law where we help entrepreneurs just like you start your businesses without having to deal with all the complicated legal forms our don for you service is backed by over 1 95 google reviews and we can help you start your business as well i am a law graduate who just recently took my bar examination i am currently waiting for my bar examination results and now i'm helping entrepreneurs just like you start your businesses if you are a business owner or a potential business owner if you've spoken with a cpa a tax person may have introduced you to the idea that your business should be taxed as an s corporation a lot of business people don't know how an s corporation affects their business it is my goal through this video to talk to you about an s corporation and to break it down in simpler terms so business owners like yourself can learn a little bit more about the nest corporation so when you're forming a business you begin by choosing a business entity now you have two options for this business entity first option is to form an llc the second option is to form an s corporation a corporation can elect to be an s corporation and whether you're a c corporation or an s corporation is strictly a federal tax issue it does not affect the type of entity you are in the eyes of the state or how the business operates on a daily basis it is strictly related to federal taxes some people say there are two corporations c and s corporations however that's not really the right way to say that a corporation can elect to be an s corporation and whether you're a c corporation or an s corporation is strictly a federal tax issue it does not affect the type of entity you are in the eyes of the state it does not affect how your business runs on a day-to-day basis again it is strictly related to federal taxes if you form a corporation the corporation defaults to a c corporation as c and s corporation those names come from the subchapter of federal tax code if you're a c corporation which is the default i will explain to you what happens with these taxes money comes in taxed as a corporation a separate entity that must pay its own taxes basically this means that when the business makes money the company must pay taxes on that money then once that money is distributed to shareholders the distribution is then taxed again subject to double taxation basically meaning that it is taxed twice as opposed to an llc which is a pass-through entity this means when money comes in it is only taxed once at the individual level of the business owners the llc is not its own separate taxable entity it is taxed in relationship to the business owners what happens when you elect to be treated as an s corporation the s corporation gets to avoid that double taxation a corporation can elect to be an s-corporation by filling out irs form 2553 the income and the losses to the corporation are taxed at the individual level of the shareholders the corporation is not paying that tax what does this mean it is going straight through to the shareholders shareholders are able to personally deduct the expense from their taxes as well that is amazing so the question you're probably asking yourself is why are not everyone why aren't more business owners electing their corporations to be taxed as an s corporation the thing with s-corporations is that the irs is very strict there are certain requirements that must be met in order for a business to meet and to be eligible for an s-corporation example the corporation must be a domestic corporation it cannot be a foreign corporation shareholders must all be individuals there's a little bit of a difference when it comes to corporations the partnerships and corporations can be shareholders of corporations however as corporations members cannot be partnerships or corporations there must be 100 or fewer shareholders only one class of stock few types of businesses that are not a legible for that so if your business is related to something along the lines of an insurance company or a financial institution those look more into it if you are illegible or not i recommend that you look a little bit more into it to determine whether or not you are eligible now if you meet requirements of an s corp it may be able to save your company a lot of money on taxes it is important to note however that llcs can also be elected to be taxed as an s-corporation llc pays taxes once instead of twice like a corporation this means that taxes passed through to the owners of the llc an owner of an llc you have to pay self-employment taxes employee of a business you get paid and some taxes are taken out but the thing is you need not pay self-employment taxes if you are an owner of the business you have to pay self-employment taxes which go to social security and medicare business owners get to take wages as employees from the company they get to pay income taxes from that money that they get paid as employees but they don't have to pay that self-employment tax if your llc is taxed as an s-corporation because they are being paid as employees and any additional income that comes in is taxed as dividends electing to be treated as an s-corporation is a way to avoid paying that self-employment tax so you may be telling yourself i'm a business owner i'm gonna go ahead and set up an s-corporation and i won't take any money out only my dividends will be subject to taxation the thing with that is irs says that all llc's taxed as an s corporation the owner employees must take reasonable wages custom pay this basically means that you must search and you must do research and you must look to see what other people in your same field are getting paid cannot just avoid paying anything and avoid paying taxes altogether do a little bit of research and determines how much someone in your position would make uh the similar practice that you participate in and so you must pay yourself that amount whatever that custom amount may be and the additional income is dividends electing to be taxed as an s corporation is a way to save a bit by not having to pay self-employment taxes this was a short and basic explanation to elect to be treated as an s corporation a lot of other things are also to be considered that i will not dive into today but if you are starting a business and you believe it is the right way to go or your business is building right now and it's growing i advise that you speak with the right cpa or a good tax attorney and if so if you determine that an s corporation is right for you that is very good you will save money on taxes it's important to note that i am not a tax expert i received a tax concentration in law school but i am not a tax expert if you have any questions about anything discussed make sure you click the link in the

Thanks for your comment Darren Bawden, have a nice day.
- Hang Paganico, Staff Member

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 lygivitniw your participation is very much appreciated
- Hang Paganico

About the author

Hang Paganico

I've studied sustainable development at Immaculata University in Immaculata and I am an expert in marxism. I usually feel sleepy. My previous job was watch repairers I held this position for 13 years, I love talking about anime and edible art. Huge fan of Benjamin Franklin I practice rhythmic and collect coca-cola.