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Small business: Corporate tax vs self employment tax

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    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%?

    #2
    S Corp

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      #3
      You should pay yourself the minimum on a w2 to stay SSN eligible but SCorp is the way to go

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        #4
        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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          #5
          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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            #6
            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
            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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              #7
              Hire a CPA. Best money you will spend!

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                #8
                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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                  #9
                  The main difference is security and liablilty issues.

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                    #10
                    Originally posted by eradicator View Post
                    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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                      #11
                      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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                        #12
                        Originally posted by Czechoholic View Post
                        Hire a CPA. Best money you will spend!
                        This without a doubt.

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