When does it make financial sense for you to file taxes as an S corporation? Here's the math. (super long post)

[jilljilljill]

@alannasteph LLC = Limited Liability Corporation. State regulations vary, so the liability limitation may not be the same everywhere. But as a corporation, an LLC is a legal entity distinct from its ownership.

The ownership of any corporation (LLC, sub-S or even C) can sometimes be personally liable for corporate debts. That happens when an attorney is able to "pierce the corporate veil". This usually occurs when an owner comingles corporate and personal funds. As it's easier to do that with a single member LLC, it's true that there is a higher risk - but the risk isn't because it's an LLC, it's because the owner didn't follow all the rules.

 

[alannasteph]

@jilljilljill Oh ok, makes sense

 

[taejon]

@sherwood This is extremely helpful. We have an accountant for this but I haven’t gotten such an in depth explanation even from her. Absolutely fantastic, Thank you. One question, in the totals bracket of the example matrix at the bottom, Is that the estimated total amount of federal tax due for the corresponding earnings?

 

[sherwood]

@taejon No, that's the tax you save through filing as an S Corp with a reasonable salary.

 

[taejon]

@sherwood Got it. Thank you!

 

[ilovejesus098]

@sherwood Check this out: https://rcreports.com/resources/rea...-can-t-afford-to-pay-reasonable-compensation/

 

[bryanll]

@sherwood Thank you so much! Last year my business was a side hustle, making me maybe 7k, and this year I went full time with it but of course my accountant and I had no idea how the biz would do so I filed an LLC and he spoke of how down the line, when I’m profiting 35k plus, it will make sense to file as an s-corp, so this year when I ended up grossing 80-90k, we’re having conversations of getting it set up this year much earlier! And this overview really helped me understand. So thank you!

 

[cwthomas]

@sherwood Is this worth it in California if income is over six figures?

 

[logmantm]

@sherwood This is a GREAT breakdown on stuff I'm not familiar with. Saved for sure haha. My wife and I also work from home. Our type of work is different, such as she's a video editor, and I'm LLC'd as a remote Customer Service Rep for various companies.

We just his 140k this year together (~85k for her, ~55k for me)... Should we be looking into this? I don't want our work to be any more entwinned than it is, nor do I want our money to be restricted, and I especially don't want her or I to have any weird situations with our spending.

 

[anassearching]

@logmantm I recommend you speak to an accountant (CPA) - I'm not one.

In absence of that advice, I'd say no. Sounds like you have two separate businesses and her work wouldn't fall under your LLC anyway. The s-corp election is something you adopt for each LLC and the break even points mentioned in this thread are the case for each LLC. But your particular lines of work matter and seeing a CPA can help you decide if it makes sense for your LLC. I can't tell by your description if she has her own LLC, but that might be worth it? See a CPA.

 

[adisa]

@sherwood !remindme 3 days

 

[jesuslover94]

@sherwood Dabomb! thanks for this useful information. I've been searching to find this on many websites, along the article I read on a website called LegaMart, yours helped me to understand this after a long time.

 

[afaithfulbeliever]

@sherwood Holy Value

 

[thescoot]

@sherwood This was incredibly informative and helpful! I met with my accountant today and he sold me on creating an S-corp, but after reading this and doing some research, on a 50k gross income it doesn't seem worth it. I read that New York City does not have an S corporation election and does not recognize a New York State S corporation election. Do you have any knowledge on this? I live in Queens, NY so an S Corp may not even be an option.

 

[sherwood]

@thescoot I don't have specific knowledge about New York and S Corps, but that rule might be different to being an LLC taxed as an S Corp, rather than forming as an S Corp in the first place. Being taxed as an S Corp is a designation that you would make with the IRS by filing Form 2553.

$50K does sound too low to be able to draw a reasonable salary as an S Corp, especially with all of the other costs you would need to pay. There is nothing to stop you just forming as a regular LLC now, and then making an S Corp tax election in a later year, when your income increases. Although do look a the rules on when you can file a 2553 in any given year.

But, I am not a professional tax adviser, so I would definitely recommend speaking to another accountant and getting their perspective.

 

[thescoot]

@sherwood You're amazing!! Thank you for the help!

 

[sherwood]

@thescoot You're very welcome - good luck on your journey.

 

[kimmysa]

@sherwood Is there no tax on distribution (left over) profit in case of an s corp?

 

[sherwood]

@kimmysa You will pay federal and state income taxes on any distributions made from the S Corp, as well as paying it on any money you take out via W2. The *only* impact that an S Corp has on tax is in reducing self-employment tax. You *do* pay that on W2 salary, but not on distributions.

 

[47ford]

@sherwood How much of a headache is this if you don't have geographical stability? I have a W2 job and a side-hustle which should bring in $100K+ annual income going forward. I've been operating and filing as a Sole Prop mostly due to convenience since I've moved states and addresses multiple times the past 5 years.