As we discussed in an earlier article, the S-Corporation is an available tax election for LLCs, both single-member and multi-member, provided that they comply with the S-Corporation restrictions.
Mainly because it lets you save potential medicare and social security taxes. Here's a simplified example:
See the following table for the simplified numbers assuming this is the Owner's sole source of income for the year. Assumptions: the owner was single, had no other sources of income, took $6,300 standard deduction, took $4,000 of personal exemption, and no unemployment considerations.
Description | Dollars |
---|---|
LLC's Net Profit | $100,000.00 |
Self Employment Tax Owed | ($14,129.55) |
Federal Income Tax Owed | ($16,450.00) |
Net Taxes Owed | ($30,579.55) |
See the following table for the simplified numbers assuming this is the Owner's sole sources of income for the year. Assumptions: the owner was single, had no other sources of income, took $6,300 standard deduction, took $4,000 of personal exemption, and no unemployment considerations.
Description | Dollars |
---|---|
LLC's Net Profit before payroll | $100,000.00 |
LLC's EmployER payroll expense (50k x 0.0765 + $50k) | ($53,825.00) |
LLC's Net Profit after payroll | $46,175.00 |
Total Income to be taxed for regular tax | $96,175.00 |
EmployEE's payroll taxes (50k x 0.0765) | ($3,825.00) |
Regular income tax owed | ($13,438.00) |
Net Taxes Owed Personally | ($17,263) |
This makes for an approximate difference in taxes in the amount of 30,579.55 minus 17,263.00 for a savings of: $13,316.55. This means if your costs of implementing payroll and complying with federal and state employment laws is less than this number (it most likely is), an S-Corporation may make great sense. Note that the numbers are always different in reality and the taxable amounts and rates change from year to year. But I hope this illustrates the substantial tax savings available with an S-Corporation.
A caveat for professionals that have high earning potential: you can't just set the salary portion of an S-Corp as low as you want; if you get audited then the IRS will argue that you should have been paying a higher salary for your position. Be sure to ask your tax professional how to set your salary versus distribution ratio for your S-Corporation.
Contacting the law firm does not create an attorney-client relationship; only a written contract signed by both lawyer and client can form an attorney-client relationship. All use of this website is subject to the site's Disclaimer and by visiting this site you agree to the Disclaimer without modification. All prices listed on the website are subject to change without notice and are subject to the Disclaimer and the Prices page.
© 2015–2020 Law Office of James Ryland Miller, PLLC. All rights reserved. No portion of this website may be used, published, modified, reprinted, or aggregated without the express written permission of Law Office of James Ryland Miller, PLLC.
Law Office of James Ryland Miller, PLLC
Mailing Address:
1098 Ann Arbor Rd W #377
Plymouth, MI 48170
Mr. Miller is physically located in Plymouth MI and
meets with clients in Arlington TX by appointment
only.