Llc Taxed As S Corp Or Sole Proprietor – As a small business owner, you’ve probably heard the terms LLC and S Corp. And it’s up to you to decide which one to create. While legal structures may not be the most exciting topic, choosing the right one is crucial for your business.
Deciding between an LLC and an S Corp starts with knowing the differences between the two and how each affects your business. Read on to learn everything you need to know about LLCs and S Corps.
Llc Taxed As S Corp Or Sole Proprietor
As a small business owner, the two legal structures you hear about the most are single-member LLCs and S Corps. Before we talk about the difference, we need to define a technique.
Small Business Tax Rates As Of 2024
Technically, an S Corp is a tax election, not a legal entity. It’s confusing, but bear with us.
The IRS assigns a default tax treatment to each business structure…which is just a fancy term for how the IRS determines how each business structure is taxed.
Single-member LLCs are automatically taxed as sole proprietorships unless they file otherwise. This is where S corp elections come into play.
You can ask the IRS to tax your sole proprietorship LLC as an S corporation, which means the IRS won’t tax you under the rules for a sole proprietorship; they are taxed under S Corp rules (more on that later).
Small Business Tax Filings
LLC and S Corp are both pass-through entities. This means that all income from the business will be included in the owner’s tax return. Unlike a C Corp, which must pay corporate taxes, your business pays no taxes. Instead, you, the owner, do it.
The IRS automatically taxes the LLC as a sole proprietorship. In this tax system, you pay two types of taxes:
You probably know that being self-employed is a tax killer, so taxes seem a lot higher when you’re a small business owner than an employee.
If you are employed, half of this 15.3% is paid by your employer through payroll tax, and the other half is paid by you, which is deducted from your salary.
How To Convert Your Sole Proprietorship Into An Llc
When it comes to S Corps, there is a significant tax difference: S Corp owners do not pay self-employment taxes on their business income. Income tax is paid only on profits.
Sounds good, we know. But there is one thing. S Corp owners must pay reasonable compensation through wages. And the wages of employees are subject to FICA payroll tax.
FICA payroll tax is 15.3% of your employee’s salary. Yes, it is the same as self-employment tax. However, the difference is that half of this (7.65%) is paid by your business through the employer’s allowance, and the other half (7.65%) is paid by you, which is deducted from your salary.
Let’s look at an example of how a small business owner will pay taxes as an LLC and as an S Corp. This example is based on a small business that makes $150,000 a year and files as an S Corp. $50,000 salary.
Llc Vs S Corp: The Difference And Tax Benefits — Collective Hub
In this example, the business owner could save $15,350 by converting to an S Corp! Note that these tax figures do not include income tax or state taxes, which vary from state to state.
For a personalized comparison of how much you can save with an S Corp, check out Collective’s Tax Savings Calculator.
S Corps cost more money than an LLC. Here are some additional costs associated with an S Corp:
You don’t want to do payroll 100% manually. Manual payroll involves a lot of interest, tax calculations, quarterly and annual forms, and payments to the IRS. If you miscalculate the payment or miss the deadline, we will charge a late fee and interest.
Should I Have My Llc Taxed As An S Corp?
Trust me it’s more work than you want. Instead, you can use a payroll service that pays for the payroll and handles all the tax payments and paperwork. Our favorite payroll service is Gusto, which is great for S Corp owners.
But like all magical things that do everything for you, Gusto isn’t free. Gusto costs $45 per month (unless you have a community membership that includes a free Gusto membership).
Gone are the days of accounting through a shoebox full of receipts. As an S Corp, you need to take your bookkeeping seriously and use legitimate accounting software such as QuickBooks Online. A basic QuickBooks Online subscription costs $20 per month (community members also receive a free QuickBooks Online subscription).
If you are an LLC, you report your business income and expenses on your personal tax return and file only one tax return.
What Is An Llc (limited Liability Company): Benefits & Implications
As an S Corp, you file a personal tax return and a corporate return for the S Corporation, 1120-S, US Income Tax Return. By filing this supplemental statement, you’ll set yourself back hundreds of dollars.
Depending on where you live, you may have to pay an annual filing fee for LLCs and S Corp.
Cash flow is money coming in and going out over a period of time. Cash flow includes your income and expenses, as well as transfers to your personal account, debt payments and savings.
Sometimes businesses are profitable but don’t have enough cash flow to sustain operations because too much money is being spent on debt, taxes, or owner payments.
Sole Proprietor Vs. S-corp Vs. C-corp (here Are The Pros & Cons!)
With an S Corp, every time you file a payroll, you pay a portion of your taxes as an employer and employee in real time. This means you need to be available each month for wages and payroll taxes.
The good news is that when it comes to liability protection, S Corps and LLCs offer the same level of limited liability protection for owners. This is because an S Corp is an LLC that is taxed under S Corp rules.
Limited liability means that if your business is sued or defaults, creditors and creditors can’t go after your personal assets, such as your home or car. Although there are some exceptions to this rule, this is generally the case.
In fact, the less you earn, the less you pay in S corporation tax. Even if there is some tax savings, the additional costs eat up the tax savings. Then you have more work without pay.
Llc, C Corp, S Corp, Sole Prop, Partnership: What Is Best For My Business?
Now that you have all the information you need about LLCs and S Corps, you can make an informed decision about which entity to form. Still not sure if an S Corp is right for you? Check out our Corporate Tax Savings Calculator to see how much an S Corp can save.
C&C readers can enjoy 2 months of community membership at 50% off with this exclusive signup link.
About the author: Andi is the head of content at Smiles Collective. He began his career as a small business financial advisor, teaching individual businesses how to take control of their finances to build real, sustainable businesses. He has helped thousands of self-employed people organize and understand their business finances and shed light on their emotional relationship with money.
Did you miss Gina Bianchini’s amazing performance on our website? Don’t worry! We’ll share your insights on building a thriving community that feels like a real network, not just an audience.
Choosing The Right Tax Structure For Your Llc Is Crucial! Whether You Choose To Be A Sole Proprietor, Limited Partnership, S Corp, Or C Corp, Each Option Has Its Pros And Cons. @kkoslawyers We
Developing an e-commerce business is an exciting journey, but let’s face it, logistical challenges can pop up unexpectedly and make things difficult. From inventory management to on-time delivery, your dreams can quickly turn into nightmares. There comes a time in every creator’s career when they need to improve their business, and with it, their business. Most creators withhold more than they should from their self-employment tax, which can cost a lot in taxes.
There’s a better way: file an S Corp. And while S Corps can be intimidating at first, this business structure is the MVP of a budding creator’s business. Here’s a full breakdown of S Corps for the creators.
The IRS assigns default tax treatment to each business structure… which is a fancy saying that the IRS determines how each business structure is taxed.
Both single-person LLCs and sole proprietorships are automatically taxed as sole proprietors. LLCs can ask the IRS to tax them differently, and sole proprietors can’t change their taxation until they form an LLC.
3 Ways To Take Money Out Of An S Corporation
You can ask the IRS to tax your sole proprietorship LLC as an S Corp, which means the IRS will not tax you under the sole proprietorship rules. They are taxed under S Corp rules (more on that later). Again, if you are a sole proprietor, you cannot change your tax structure until you form an LLC.
Whether you keep your earnings in your business or use them personally, if your business makes money, you have to pay taxes on it.
Everyone pays income tax based on their tax bracket, and being self-employed does not affect your income tax. But there is also the self-employment tax.
When you are employed, then