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The Low Down on Tax Elections as an LLC

There is a common misconception that an S-corp is an entity, but it is simply a tax election. You can elect to be taxed as an S-corp, but legally your entity is still an LLC. Now, let's go over the differences of being taxed as an LLC vs. an S-corp.


The default tax election for LLCs is to be taxed as a disregarded entity, aka a Sole-Proprietorship.



LLC taxed as a disregarded entity (Sole-Prop)

1. Report business income & expenses on their personal income tax return

2. Pay personal income tax on company profits

3. Pays social security and Medicare taxes on said profits



S-Corp tax election status

1. Owner’s salary will be a business expense for the owner will report salary and other business profit on their personal income tax return.

2. Electing an S-corp tax status also means you may save money on social security and Medicare taxes.

3. Owner only pays taxes on their own salary, not on SSI or Medicare



S-Corp makes sense if you will save on taxes

1. Determine a reasonable salary for your job description

2. If profit remains after paying yourself, then it’s probably not worth it



You have 75 days after formation to elect S-corp. If you want to change to an S-corp, you have to file with the IRS by May 15th of the current year for the election to retro back to the current year. If you miss the deadline, you can still file the paperwork but it will not go into effect until the next calendar year.




The IRS does have a few restrictions for S-Corp tax election status:

1. 100 shareholders max

2. US Citizen

3. More in-depth Bylaws around stocks, shares issued, shareholders, etc.



Resources:

IRS - Default tax election for LLC


IRS - S-Corp tax election


S-Corp “reasonable salary” calculator



If you are unsure on which status to elect, always speak to your account to help you make a decision. But again, you can always change your election should your original choice no longer work for you and your business.


What are you thoughts on electing an S-corp tax election? Has it worked for you? Let us know in the comments!







*The above links will direct you to websites outside of Urban Consulting, LLC. We are not responsible for the content, dates published, updates on any changes to the information or the like. Any potential political, religious or other views of those websites are not support by Urban Consulting, LLC.


**The above is for information and educational purposes only and should not be considered as legal or tax advice nor does it constitute a client-consultant relationship. Seek guidance from a qualified lawyer or accountant.

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