When should LLC elect to be taxed as ccorp tax [Glossary]



Last updated : Sept 26, 2022
Written by : Jessie Richelieu
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When should LLC elect to be taxed as ccorp tax

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.

What is the best tax classification for an LLC?

A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation.

Should you choose S Corp tax status for your LLC?

If you form an LLC without electing S Corp taxation, you could have a higher tax bill. The IRS taxes an LLC as a sole proprietorship by default, which includes self-employment tax on all of your business's profits. Electing S Corp status for your LLC could reduce the amount of income subject to self-employment tax.

When should you elect to be taxed as an S Corp?

The election must be filed with the IRS no more than two months and 15 days after the beginning of your corporation's tax year.

What 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.

Should multi member LLC be taxed as S corp?

If you form a multi-member LLC and do not file any special form with the IRS, the LLC will be taxed as if it were a partnership. Regardless of whether you have a single-member or a multi-member LLC, you can choose to have it treated as an S corporation by filing IRS Form 2553, Election by a Small Business Corporation.

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.

How do taxes work for LLC?

For the purposes of federal income tax, LLCs are treated as pass-through entities, which means that LLCs themselves do not pay taxes on their business income. It is rather its members who pay the taxes on their share of LLC's profits.

Do I file LLC and personal taxes together?

Single member LLCs are typically treated the same as sole proprietorships. The IRS disregards the LLC entity as being separate and distinct from the owner. Essentially, this means that the LLC typically files the business tax information with your personal tax returns on Schedule C.

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 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.

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.

Do I file Form 8832 or 2553?

Use Form 8832, Entity Classification Election to make an election to be a C corporation. Use Form 2553, Election by Small Business Corporation to make the election to be an S corporation. If a taxpayer doesn't file Form 2553, the default classification will apply.

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.

Do you have to elect S-Corp status every year?

December 31 must be your year-end. You need to make the S Corporation election no later than two months and 15 days after the first day of your taxable year. All shareholders need to agree to the S Corp election.

What is the disadvantage of an LLC?

Disadvantages of creating an LLC 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. Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.

Is it better to be self employed or LLC?

You can't avoid self-employment taxes entirely, but forming a corporation or an LLC could save you thousands of dollars every year. If you form an LLC, people can only sue you for its assets, while your personal assets stay protected. You can have your LLC taxed as an S Corporation to avoid self-employment taxes.

What are the tax advantages of an LLC?

An LLC can help you avoid double taxation unless you structure the entity as a corporation for tax purposes. Business expenses. LLC members may take tax deductions for legitimate business expenses, including the cost of forming the LLC, on their personal returns.

How is an LLC with multiple members taxed?

Multi-member LLCs are treated as pass-through entities for federal income tax purposes. Similar to the single-member LLC, this means that the LLC doesn't pay taxes of its own. Instead, each member pays taxes on the business's income in proportion to their ownership stake in the LLC.

Is it better to be a single-member LLC or multi-member LLC?

A single-member LLC is easier for tax purposes because no federal tax return is required, unless the business decides to be treated as a corporation for tax purposes. The income is reported on the member's tax return. A multiple member LLC must file tax return, and give the members K-1 forms to file with their returns.


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When should LLC elect to be taxed as ccorp tax


Comment by Vickie Waldoch

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 Vickie Waldoch, have a nice day.
- Jessie Richelieu, Staff Member


Comment by dagenC

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 dagenC your participation is very much appreciated
- Jessie Richelieu


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