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Old 07-12-2018, 02:55 PM   #1
miket
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Default Small business: Corporate tax vs self employment tax

Been looking into changing from SP to LLC. One factor is an attempt to avoid the self employment tax. It is about 15%. As of now all profit is income so self employment tax applies. But if I go LLC and file form 8832 my personal income will not be self employment taxed but company profits will be taxed at corporate tax rate of 21%. So my question is, where is the benefit? Is it better to pay self employment tax on all of it? Only way I can see it working out in favor of filing 8832 is if I pay myself all the profits anyway? I guess?

Maybe its better to not file 8832 and stay as disregarded entity and "only" pay 15%?
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Old 07-12-2018, 02:58 PM   #2
brownchristian
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S Corp
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Old 07-12-2018, 03:01 PM   #3
Gunnyart
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You should pay yourself the minimum on a w2 to stay SSN eligible but SCorp is the way to go
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Old 07-12-2018, 03:04 PM   #4
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You can do a LLC with an S Corp election. You pay yourself the lowest salary that you can justify. You will pay self employment tax on your salary but the rest of your profits will go to you as dividends with no self employment tax.
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Old 07-12-2018, 03:08 PM   #5
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Originally Posted by brownchristian View Post
S Corp
From what I understand, filing IRS 8832 can have the copany taxed as an S Corp.

Here is an example of my issue, found on another site :

Now suppose you have elected to be taxed as an S corp. and have determined that your reasonable salary is $50,000. Your salary is a business expense, so the business now has a $50,000 profit. You will still report $100,000 of income [$50,000 of salary plus $50,000 of profit], but you and your business will only pay Social Security and Medicare taxes on your $50,000 salary.


So, now the remaining $50k profit will be taxed at 21% ( corporate tax rate ) correct? Thats almost 6% MORE in taxes. I just dont see the gain, but I know I am missing it.
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Old 07-12-2018, 03:19 PM   #6
miket
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Quote:
Originally Posted by Gunnyart View Post
You should pay yourself the minimum on a w2 to stay SSN eligible but SCorp is the way to go
Quote:
Originally Posted by ken View Post
You can do a LLC with an S Corp election. You pay yourself the lowest salary that you can justify. You will pay self employment tax on your salary but the rest of your profits will go to you as dividends with no self employment tax.
So I can pay myself almost all of the rest of the company profits as a distribution and be legal? Just pay regular income tax on it?
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Old 07-12-2018, 03:55 PM   #7
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Hire a CPA. Best money you will spend!
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Old 07-12-2018, 03:57 PM   #8
brownchristian
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Quote:
Originally Posted by miket View Post
So I can pay myself almost all of the rest of the company profits as a distribution and be legal? Just pay regular income tax on it?
Correct.
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Old 07-12-2018, 04:21 PM   #9
eradicator
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The main difference is security and liablilty issues.
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Old 07-12-2018, 06:03 PM   #10
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The main difference is security and liablilty issues.
This has always been my understanding as far as benefits go from being an LLC or SP.

Myself and a colleague are currently exploring options for going independent or starting our own company so I'm following along to see what else I can learn.
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Old 07-12-2018, 06:35 PM   #11
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Quote:
Originally Posted by miket View Post
So I can pay myself almost all of the rest of the company profits as a distribution and be legal? Just pay regular income tax on it?
It has to be a wage that is commensurate with your position or some such jargon. I'd talk to a CPA to be safe.
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Old 07-12-2018, 08:32 PM   #12
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Hire a CPA. Best money you will spend!
This without a doubt.
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