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.