Tax rate for LLC vs scorp advantages vs disadvantages [Guide]



Last updated : Sept 17, 2022
Written by : Stacia Barscewski
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Tax rate for LLC vs scorp advantages vs disadvantages

Is an S Corp or LLC better for taxes?

Who pays more taxes, an LLC or S Corp? Typically, an LLC taxed as a sole proprietorship pays more taxes and S Corp tax status means paying less in taxes. By default, an LLC pays taxes as a sole proprietorship, which includes self-employment tax on your total profits.

Are LLCs and S corps taxed the same?

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.

What are the advantages of an S Corp over an LLC?

The advantages of becoming an S corp include: Pass-through taxation by shareholders reporting their profits and losses on individual tax returns. Limited liability extended to company directors, officers, shareholders, and employees. Perpetual existence, even if the owner leaves or passes away.

Why are LLC generally less expensive to operate than an S Corp?

A key feature distinguishing LLCs from S Corps is that businesses need fewer forms to register, which can reduce start-up costs. In addition, it is not necessary to hold formal shareholder meetings and maintain annual minutes for LLCs.

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.

How much does an S-Corp pay in taxes?

California does tax S Corps Most states follow the federal IRS rules and don't make S Corps pay income tax, but California is an exception. All California LLCs or corporations that choose S Corp taxation must pay a 1.5% state franchise tax on their net income.

How do I choose between LLC and 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.

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 does an S Corp save on taxes?

S-Corp election lets you split your profits into “shareholder wages” (subject to 15.3% self-employment taxes) and “distributive share” (NOT subject to 15.3% self-employment taxes). Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.

What are the disadvantages of an S Corp?

Disadvantages of S corporation types include legal barriers that prevent them from having more than 100 owners or having shareholders that are non-U.S. persons. S corporations are also handicapped by requirements to hold annual meetings and appoint a board of directors.

Do S corps pay quarterly taxes?

Quarterly income tax return deadlines This requires the S corporation to file an IRS Form 941 each quarter to report the aggregate amount it withholds and needs to send to the IRS. The form is due four times a year typically on January 31, April 30, July 31 and October 31.

Can my S corp pay my personal taxes?

An S corporation is a pass-through entity—income and losses pass through the corporation to the owners' personal tax returns. Many small business owners use S corporations. One of the biggest reasons is that an S corporation can save a business owner Social Security and Medicare taxes.

Why choose an LLC over a corporation?

You may prefer an LLC if you: want a high degree of management flexibility in running your company. want to allocate profits and losses based upon criteria other than ownership percentage. prefer to avoid the state-mandated requirements imposed on corporations, such as annual meetings.

Why would an LLC elect to be taxed as an S-Corp?

The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

How do I pay $800 minimum franchise tax for an S-Corp?

  1. Go to www.ftb.ca.gov/pay.
  2. Choose “Bank Account”
  3. Choose Web Pay Business or Web Pay Personal, depending on the entity type. Follow the prompts to provide the requested information and pay the tax.

What are the benefits of having an S corp?

  • Asset protection.
  • Pass-through taxation.
  • Salary and dividend payments.
  • Ease of conversion.
  • Strict qualification requirements.
  • Rigid profit and loss allocation.
  • Corporate formalities.

What happens when an LLC converts 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.

Can you turn an LLC into an S corp?

Converting your LLC to an S-Corp when filing your tax return for tax purposes can be a complicated process, but it is possible. You can submit the documents necessary to convert your LLC to an S-Corp for tax purposes along with your tax return.

Are S corps taxed twice?

This myth is true; S corporation owners don't have to pay double taxes; this is one of the primary benefits of S corporation status. Double taxation to corporate shareholders is a result of the corporation paying income taxes, then the shareholders paying income taxes on the dividends they receive.

What is the S corp loophole?

One of the tax loopholes with S corporation status is that the business owner can avoid self-employment taxes apart from Social Security and Medicare.


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Tax rate for LLC vs scorp advantages vs disadvantages


Comment by Aron Digiovanni

one of the most common questions that we get here at freedom tax accounting is what's better for my business an llc or an s corporation in this video we're going to discuss the llc tax structures the s-corporation tax structures and we're also going to going to discuss the tax benefits of the llc and the tax benefits of the s-corporation so that's what we're going to talk about in this video hello from freedom tax accounting we're an accounting firm where we have been providing quality tax and accounting services now for over 20 years if you are new to this channel we provide strategies for small business owners so they can achieve their financial goals if that is a topic that you like please subscribe to our channel now many uh entrepreneurs that are going to start a business or that they already have a business form they read all this stuff on the internet about llcs and s-corporations and what one of the most common questions we get here at freedom tax is what's better for my business an llc or an s corporation well every case is different the information that we are going to share with you today is general knowledge but every case is different that's why we always recommend that you consult with a tax professional so that they can evaluate your case and they can do a recommendation based on your specific business needs if you are in need of a consultation you can contact us in freedom tax accounting because we do provide those types of consultations okay now let's get into the content so basically the first thing you need to do or know about an llc and an s-corporation is what are they what is an lc and what is an s-corporation and here is a list of the four main legal business structures there are many different types of legal business structures in the us usa but these are the four most commons okay now these are legal business structures you have your sole proprietorship basically this is where the independent contractors self-employed um people they work as a sole proprietorship uh legally you have a partnership you have a limited liability company which is the llc and you have the corporation now these as you can see the s-corporation is not on this list why because the s-corporation is not a legal business structure an s-corporation is a tax structure that is applied to a business and we will go more deep into that a little bit further on this video so that's important to know the llc yes is a legal business structure but the s corporation is not a legal business structure the s corporation is only a tax structure for a business okay now let's go first into the llc tax structure when you have an llc and you have an llc with one owner okay the irs gives that llc an automatic designation for taxes the irs says this single member lc legally is a sole proprietorship and he needs to file his taxes under schedule c or schedule e if they have uh real estate rental income okay now the schedule c and the schedule e or the sole proprietorship is the automatic designation for taxes for single member llcs but the owner has the capacity to tell the irs irs i want my single member lc i don't want it to be a sole proprietorship for taxes i want my single member lc to be considered an s corporation for my taxes or to be considered a c corporation for my taxes if you change it to an s corp then you file form 1120s or if you file as a c corp you file form 1120 for your business taxes okay now if you open up an llc with two or more owners the automatic designation for taxes is that the irs considers your llc a partnership and you need to [ __ ] you need to file taxes under form 1065 and you have the same option you can tell the irs that you need you want to change your multi-member llc to file taxes as an s corporation or as ac corporation okay so your llc legally is an llc but your llc for tax purposes can have can file taxes five different ways your llc can file taxes under schedule c under schedule e excuse me let me put this back okay under the 1120s under the 1120 or the 1065. so here you can see that you can open up an llc which is going to be your legal business structure but your llc has tax structure options you can choose how your llc files taxes based on what your lc does how many members if the owners are foreigners there are many many options for lc to file taxes now if you want to know in detail how each of these five ways affect your taxes we did a video in the past called the five ways an llc can file taxes we are putting the link for that video on the top right of this video right now and we're also going to put a description to this a link to this video in the description of this video okay so it's a very good video for you to see very good information now let's go into the corporation tax structure okay remember you can open up an llc as a legal structure and you can open up a corporation as the legal structure you can the corp or the ink is the same thing okay now for a corporation if you open up a corporation with one owner the automatic designation for taxes is that you are a c corporation and you file taxes under form 1120 okay but you also have the option of telling the irs irs i want my c corporation to file taxes as an s-corporation okay and to file taxes under form 1120s all right now if you open up a corporation with two or more owners is the same thing okay the automatic designation is ac corporation but you can choose to pay taxes as an s corporation all right so here you can see that if you have a corporate corporation legal business structure your corporation can file taxes as a c corporation and an s corporation okay now let's go into the tax benefits or tax advantages of the llc and the tax benefits and the tax advantages of the corporation okay so let's start with the llc when you open up an llc with one owner remember that the irs says that you're a sole proprietorship and that you need to file taxes under schedules schedule c or schedule e if you're doing rental income okay how does the schedule see work you report your business income during the year and during the year you have all your expenses and at the end of the year you have your net profit or your net loss okay now this is the llc now this is the owner's personal tax return which is form 1040 okay this net profit right get flows through the owner's personal tax return at and is added to the household income okay now so this net profit that get re gets reported on the owner's personal tax pays the federal tax rate the individual federal tax rate which starts at 10 percent and you pay self-employment tax which is 15.3 percent in taxes that 15.3 is composed of medicare and all of it is mostly social security okay now this 10 tax rate that you pay on the net profit can go all the way up to 37 why because it is subject to the household income so if your household has higher income then you're going to pay a higher tax rate here okay so that's the way the llc works for taxes under the schedule c now what happens when you change it over to an s-corporation okay let's talk about that so remember you can tell the irs that you want your llc to pay taxes as


Thanks for your comment Aron Digiovanni, have a nice day.
- Stacia Barscewski, Staff Member


Comment by Shannon

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 Shannon your participation is very much appreciated
- Stacia Barscewski


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