1

Situation:

A person has a good-paying job where the Social Security tax limit is reached or almost reached every year, and the person also has a side business (LLC) that brings in more than 100k every year with the profit projected to double in the near future.

Dilemma:

Should that business be switched to an S-Corp, or should it maintain its status as LLC since the self-employment tax savings are mainly only on the Medicare part?

Improve this question
4
  • if you want a rough and ready answer, (A) I wouldn't even bother with an SCorp until say 1/2m, and (B) I wouldn't bother with an LLC. there is absolutely no advantage, at all, to an LLC over just being "self-employed". one man's vote!
    – Fattie
    Feb 3, 2021 at 16:51
  • @Fattie Isn't the major advantage to the LLC the personal liability protection? Also, at 1/2m, what would change that would make an SCorp more desirable in terms of taxes?
    – papiro
    Feb 21, 2023 at 18:25
  • hi @papiro I'm almost certain that in the US, in all states, LLCs simply offer zero, no, personal liability protection. it is literally just a "paperwork convenience". (in general "personal liability protection" is largely a myth. any structure can be easily "pierced" as they say, in legal / civil matters. in theory you can get some protection against bankruptcy, but, no banks loan to SCorps for that reason. the only "loan" you can get as an SCorp is against your house)
    – Fattie
    Feb 21, 2023 at 20:22
  • @papiro "also, at 1/2m, what would change ..." almost nothing. (Indeed notice the currently ticked answer) i'd say its more "prestigious" or "serious" to have an SCorp. so, it would "look more impressive" to clients etc.
    – Fattie
    Feb 21, 2023 at 20:23

2 Answers 2

Reset to default
2

I have a few LLCs. I considered changing t o S-Corp taxation to reduce taxes but ended up not doing so.

Trump implemented tax cuts for LLCs with pass-through taxation (i.e., not S-Corp taxation). This tax cut is close to the amount you would save with an S-Corp so there is no longer much benefit to having an S-Corp.

In sum:

  • LLCs with pass-through taxation have a tax break that Trump created
  • S-Corps allow you to reduce self-employment taxes

You can get one but not both of the above and they each save you about the same amount of tax. There is a lot more overhead with an S-Corp so for me it was an easy decision to not do it.

Improve this answer
1
  • This isn't correct. S-Corps are also pass-through entities and also can take advantage of the QBI.
    – papiro
    Feb 21, 2023 at 18:27
2

It might be worth it to simulate the tax scenarios for both state and federal taxes, to make your decision. Possibly you could run these scenarios yourself using tax software.

Also, you may or may not know that an LLC can file taxes as an S-corp without changing the business structure. I.e. there is no need to dissolve the LLC and incorporate, regardless of your decision.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .