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I do a ton of freelance web design and decided to setup a simple LLC so I could have a credit card to make business purchases with. From my limited understanding, I can choose to be taxed as an S-corp or a C-corp. I believe that as an S-corp my earnings before taxes will not include what I pay myself out of the company's income.

If I were to do a C-corp, would I need to submit a W2 for myself and pay myself some amount of money each month? Then the money I paid myself would be a business expense, and lower the actual amount of money the LLC would have to pay taxes on, with the caveat that I then pay personal taxes on the money paid to me via W2.

My wages are currently under $100,000, and I am the only employee of my LLC. Income varies drastically month to month. How do you recommend I structure the method that I use to pay myself? C-corp or S-corp? In the past I've filed as an S-corp I believe, and had my business income lumped into my personal tax return.

Also, I am looking to buy a home in the next couple of years. Does this affect anything?

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You're conflating LLC with Corporation. They're different animals. LLC does not have "S" or "C" designations, those are just for corporations.

I think what you're thinking about is electing pass through status with the IRS. This is the easiest way to go. The company can pay you at irregular intervals in irregular amounts. The IRS doesn't care about these payments. The company will show profit or loss at the end of the year (those payments to you aren't expenses and don't reduce your profit). You report this on your schedule C and pay tax on that amount. (Your state tax authority will have its own rules about how this works.)

Alternatively you can elect to have the LLC taxed as a corporation. I don't know of a good reason why someone in your situation would do this, but I'm not an accountant so there may be reasons out there.

My recommendation is to get an accountant to prepare your taxes. At least once -- if your situation is the same next year you can use the previous year's forms to figure out what you need to fill in. The investment of a couple hundred dollars is worthwhile.

On the question of buying a home in the next couple of years... yes, it does affect things. (Pass through status? Probably doesn't affect much.) If all of your income is coming from self-employment, be prepared for hassles when you are shopping for a mortgage. You can ask around, maybe you have a friendly loan officer at your credit union who knows your history. But in general they will want to see at least two years of self-employment tax returns. You can plan for this in advance: talk to a couple of loan officers now to see what the requirements will be. That way you can plan to be ready when the time comes.

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    All correct. At that salary, you should probably incorporate and pay yourself income from the company. Seek an accountant.
    – Ash Machine
    Jun 29, 2011 at 16:36

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