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Written by : Farrah Maleck
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if you run your own business or maybe you're just starting out or confused about the distinctions between an LLC and an escort or escorts in general you're in the right place I'm Tony from the really useful information company and in this video we're gonna talk about what an S corporation or S Corp is the benefits of an S corp the complications and potential drawbacks and finally how to decide whether or not choosing an S corp is right for you the following information is for educational purposes this is not legal tax or financial advice before acting on any of this information consult with a registered accountant to begin an S corporation or S corp is not a formal business structure it's a tax classification both an LLC and a corporation can choose to be taxed as an escort for simplicity in this video we will focus solely on LLC's that choose to become S corporations there are single member LLC's and multi member LLC's and both can become escorts and LLC terms a member is an owner LLC members are not employees in fact members cannot be employees in tax terms this means members are not paid a salary they still work of course but they are paid in what are known as distributions when an LLC chooses to be taxed as an S corp it allows members to be paid a salary as well as a distribution and this is where it gets interesting because salaries and distributions in an S corp are taxed differently well look at these important differences in just a moment but before we do we should first have a look at a few restrictions as corporations F S corporations must not have more than 100 shareholders the shareholders must be US citizens or permanent legal residents the shareholders must be private individuals and may not include LLC's other corporations or certain types of trusts and finally s corpse can only issue one class of stock if these restrictions work for you keep watching to see why or why not you may want to seek S corp class vacation so we now know that an S corp allows the members of an LLC to be treated as employees and earned both a salary and distributions before we look at the details of how these are taxed differently let's be clear about something the IRS wants to collect employment taxes they want to collect employment tax and they want to collect income tax let's look at how they do that in different scenarios first if you have a single member LLC you are taxed by default as a disregarded entity money passes through the LLC to you you cannot be an employee so your income is in the form of a distribution that distribution is subject to employment tax and income tax a multi-member LLC taxed by default as a partnership works the same way the income passes through is paid as distributions and those distributions are subject to employment tax and income tax if an LLC successfully becomes an escort then the members can be employees the income generated is paid to the members both as a salary and a distribution the salary is subject to employment tax and income tax the distribution however is only subject to income tax you do not have to pay employment tax on a distribution in an S corp and this is how you can potentially save money employment tax is around 15% and as stated the IRS is going to collect it but an S corp allows you to limit that employment tax to a reasonable salary amount while the rest of your income paid in the form of a distribution is only subject to income tax thus the main benefit of an S corp is that it saves you from paying self-employment tax on distributions now let's look at the drawbacks and complications there are three complications that may be drawbacks s corpse now that we know the benefits let's consider these three reasons you might not want to form an escort the first is salary the term used by the IRS is reasonable salary and this is the amount that as a member of the LLC turned S corp you will pay yourself in addition to distributions you must choose a reasonable salary as if you are hiring another person to do your job you can research this amount on sites like last or com but ultimately you are responsible for choosing this salary amount and the IRS has increased scrutiny of escort member of salaries if you pay yourself an unreasonably low salary whether by mistake or in an effort to pay less employment tax the IRS may take notice and engage your S corp status demanding back taxes and fines so be mindful when determining your reasonable salary secondly while the potential savings of an escort basically 15% of your distribution can be significant the reality of an S corp is that it requires more work there's an expenditure of effort on your part in terms of running payroll organizing a more complicated tax withholdings and so on and this increased complexity is going to require the cost and effort of a professional accountant we estimate the approximate added cost of properly running an S corp to be between one and two thousand dollars a year if the money you are saving not paying employment tax and this distribution is less than this amount it's probably not worth it specifically if your distribution is not more than ten thousand dollars it's not really worth the cost an effort of maintaining an S corp and finally there's the consideration of reinvestment if your company is successful and you know you're going to have a surplus of revenue you can choose what to do with that money some of the choices are suited for S corp and others not so much generally speaking an S corp will serve you best if you know you're going to make a lot of money in the form of distribution and you want to take all that money out of the LLC to pay yourself if that is the case an S corp is a good choice and will allow you to save employment tax on that large district however if you make a surplus of income and when I reinvest that amount into the company in the same year you made the money you are better off staying in LLC this will avoid unnecessary income and employment taxes lastly if you have surplus revenue that you want to carry over and reinvest into the company but not immediately perhaps over several years you may be best suited by a traditional corporation which is taxed as AC Corp let's keep this simple the main factor to consider is whether or not you have sufficient profit to justify escort classification if your distribution after paying yourself a reasonable salary is greater than ten thousand dollars you have sufficient profit to justify the cost and effort of an escort if you don't know how much profit your LLC is going to make it is pointless to become an escort to start off you can always change your tax status later if you know for certain you will have sufficient profit secondly escorts are a great choice if your intent is to withdraw all the profit from the company rather than reinvesting if you have other plans to reinvest your company profit LLC default tax status or C Corp classification may be more cost effective we hope this video has provided you with useful and actionable information regarding your LLC and your understanding of the S corporation tax classification we offer this as educational
Thanks for your comment Archie Huxtable, have a nice day.
- Farrah Maleck, Staff Member
so what's the difference between an s-corp and an llc well first off both of them are actually llc's when we refer to an llc here we're talking about an llc taxed as a sole proprietor we'll just call it an llc and then when we talk about an s corp we're actually referencing an llc tax as an s corporation both llc's and s corps provide business owners with a couple of things legal protection so that they're there's a corporate veil between the company's assets and your personal assets they provide some operational advantages like partnerships and the ability to collaborate with others and they both serve as pass-through entities for taxes which means the profits and losses will flow through to the business owner so let's get a little more specific here for both an llc and an s corp you're going to be figuring out your tax on your net profits now net profit is what's left over after you subtract all your deductions and write-offs from your business's gross income now in an llc your entire net profit will be subject to what's called self-employment tax remember when you were an employee at another company and your paycheck had that little fica or medicare deduction well when you have an employer and an employee relationship your employer would have paid half the social security limit and medicare tax while the employee paid the other half now that you're self-employed you'll get to pay the tax of fifteen point three percent on all net earnings up to the social security limit which changes each year but is at eighteen a hundred and eighteen thousand five hundred for two thousand fifteen after you hit the social security limit all your earnings above that you'll owe medicare taxes which is two point eight percent then after you pay yourself employment tax you'll be subject to state and federal income tax this is simplifying it a bit but essentially you'll be paying an increasingly higher or marginal tax rate on your earnings the more you earn the higher your tax rate so with an llc you'll pay 15.3 self-employment tax on all of your net profits then you'll pay state and federal income taxes on your personal tax return let's look at a quick scenario uh focusing just on the self-employment taxes for a fictitious llc taxed as a sole proprietor here if you had taken in total revenue of whatever then after your deducts deductions and expenses you had a net profit of a hundred thousand dollars your self-employment tax bill would come up to fifteen thousand three hundred so we've got a hundred thousand dollars in net profit and fifteen thousand three hundred dollars in self-employment taxes breaking that down a little bit that's a monthly bill of 1275 dollars just for your self-employment taxes now after you've done your self-employment taxes you'll still owe state and federal income taxes which if you were single and had let's say 85 000 in taxable income just your federal income tax bill would be about 17 thousand three hundred and twenty five dollars on top of your self-employment taxes that's not even factoring in your state income tax property taxes or anything else you pay that seventeen thousand in federal income tax is just for a single person paying on 85 000 in income so this puts your total tax bill excluding fees sales taxes property taxes state income taxes or other dues the total tax bill at a conservative 33 thousand dollars a year that means you're taking home 8 300 a month and writing a check to the government for 2750 a month just for self-employment taxes and federal income taxes if that doesn't get your heart racing a little bit i'm not sure what will so the question is what can we do about this conundrum well the most popular strategy employed is incorporating to an s corp with an s-corp you'll incorporate and become an employee of your corporation then you'll take two forms of income the first part of your income is that you'll pay yourself a salary and the second part of your income is what's called a distribution or a dividend so we're going to split up the income into these two parts the salary and then the distribution what you'll see in a minute is that the salary is subject to the 15.3 self-employment tax while the distribution is not so you're paying 15.3 percent on your salary but not on your distribution because the distribution income isn't subject to that fifteen point three percent tax the temptation can be to falsely shift all your income over to the distribution and not take a reasonable wage which is why the first part of your income or that salary or wage or payroll must be reasonable according to the irs there are multiple factors that dictate what kind of a salary you need to pay yourself the salary needs to be reasonable for your experience comparable salaries economic conditions and a bunch of other factors this is super important you must take a bona fide reasonable salary so now let's take a look at a fictitious s corp example now looking at the same hundred thousand dollars of net profit you'll pay yourself for this illustration a sixty thousand dollar salary then you would take out forty thousand dollars in distributions this is just an example the tax benefit is that the salary is subject to that fifteen point three percent s e tax but the distributions are not subject to the sc tax this means that forty thousand dollars in distributions aren't subject to a fifteen point three percent tax putting your total self-employment tax due down from fifteen thousand three hundred when you were an llc to nine thousand one hundred and eighty as an s corp that's a forty percent decrease rather than paying one thousand two hundred and seventy five dollars a month in se taxes as an llc you'll be paying 765 a month as an s corp that means you've essentially freed up 510 dollars in monthly cash flow in this scenario in a scenario like that 510 dollars a month can easily help you save for retirement pay off your mortgage early hire some help reinvest in your business advertise or invest in real estate sooner now if you've already become an llc and you like the idea of becoming an s corp you have to file for an s election in order to become an s corp before march 15th that's a whole month before april 15th when your taxes are due or you'll have to wait till the next year strategies that utilize an s-corp can give you tools to help mitigate your taxes but these strategies should be handled by a competent cpa or a tax professional here at nuance financial we specialize in helping small businesses from across the country implement these strategies as part of a long-term tax plan so check out the description below and go to nuancefinancial.com we'd love to connect with you and provide a free consultation you
Thanks Sylvester your participation is very much appreciated
- Farrah Maleck
About the author
I've studied myriapodology at Oklahoma Panhandle State University in Goodwell and I am an expert in internet (outline). I usually feel naughty. My previous job was animal control worker I held this position for 4 years, I love talking about rapping and airsofting. Huge fan of Billy Ray Cyrus I practice dog sledding and collect coca-cola.
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