Should I consider the S Corporation election for my new Limited Liability Company?
While there are generally several benefits for an LLC to be taxed as an S Corporation instead of being an LLC taxed as a Sole Proprietor, the two most appealing are:
1. Reduced Internal Revenue Service audit risk.
2. Potential self-employment tax savings.
In this hypothetical instance, say you had not withdrawn any funds from your LLC and had earned approximately $20,000 during year-to-date 2009, you could save roughly $2,400 on your 2009 Form 1040 (individual income tax return) by electing S Corporation status for your LLC.
A sole proprietor (Form 1040, Schedule C) is subject to the 15.3% self-employment tax regardless if the owner pulls the money out of the business account.
On the other hand, S Corporation owners pay self-employment taxes when they actually pull out money (profit) from the Company. And then a decision is made as to how much to subject to income tax when computing owner wages v. owner draw. A conservative allocation is 50/50 while a more aggressive allocation is 25/75.
Therefore, while one might enjoy considerable tax savings in this instance ($2,400); it’s possible you may pay as much as $1,800 the next year in payroll taxes (Federal, FUTA, SUTA) if you were to allocate $10,000 to wages.
Plus don’t forget the preparation fees to produce quarterly returns and W-2s.
Therefore, an S Corporation election may not be in one’s best interest because it’s predicated on your business activity and also your other personal income and deductions.
Of course, sometimes it’s EASY – a no-brainer decision; other times a much more difficult decision and involves the proverbial “crystal ball”.
