Author Topic: New LLC electing to be taxed as an S-CORP  (Read 267 times)

danb

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New LLC electing to be taxed as an S-CORP
« on: November 07, 2018, 01:49:59 PM »
I just created an LLC and i intend to elect to be taxed as an scorp. My understanding is that this election has to happen 6 months before taxes are due. Being that taxes are due in 5 months I assume I have to wait till 2019 to elect to be taxed this way. My question is, is this true, and if so would it be problematic to create a w-2 and pay myself a reasonable salary now in accordance with the scorp regs, or should i just give myself a 1099 until i can make this election.

MMbergmann

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Re: New LLC electing to be taxed as an S-CORP
« Reply #1 on: November 07, 2018, 02:02:36 PM »
"No more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or At any time during the tax year preceding the tax year it is to take effect."


From the S-election Form 2553 instructions. So you would have had to do it on March 15th this year if you started on January 1. It would probably be less of a headache to elect it for next year, since if you did so now you would have a short year.


Alternatively, if you find a good tax accountant, they can usually help you with a late-filed election. There is special verbiage that lets you file late and have it be effective when you want it to, i.e. the whole year for 2018.

danb

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Re: New LLC electing to be taxed as an S-CORP
« Reply #2 on: November 07, 2018, 02:43:57 PM »
Thanks for the reply.  I have not started taking clients yet as I am still working a FT job. I intend to transition to the freelance life and just trying to get everything setup from a legal stand point.  I prefer to not mix 1099 and w2 if I dont have to. Also I prefer to have the ability to take distributions immediately as away to limit self employment tax.  It sounds like your saying if I am able to find an account who can help file a late-filed form 2553 I can start off as a w-2 employee this year, but if I can't then I should pay myself as a 1099 this year, and starting in 2019 I can do a W-2 for myself, and make sure I elect s-corp within 2 months, 15 days of the new year?

carolina822

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Re: New LLC electing to be taxed as an S-CORP
« Reply #3 on: November 07, 2018, 02:54:43 PM »
I've never had an issue getting a late election accepted (YMMV, but it's likely to be fine.) You don't have to 1099 yourself - you're a shareholder, so the income reported on your K1 from the LLC's tax return will flow through to your personal taxes. Note: it's taxable to you the year it's earned (SE tax included), whether you actually "distribute" it to yourself or not. Another note: if you decide to wait until 2019 to make the election, you can go ahead and do it now, just make sure to make the effective date 1/1/19.

SeattleCPA

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Re: New LLC electing to be taxed as an S-CORP
« Reply #4 on: November 07, 2018, 05:12:04 PM »
Usually you don't want to run a part-time S corporation. It probably doesn't save you money if you do the returns correct.

Some additional thoughts here:

https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

danb

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Re: New LLC electing to be taxed as an S-CORP
« Reply #5 on: November 08, 2018, 07:13:29 AM »
Thanks for the link.  Can you explain this part to me? I don't understand the 3% -4%.  I thought employment was 15% half from the company, 1/2 from the employee


'And then even if you are able to shield lots of profit from payroll taxes, you need to be sure that you’re not taking profit would have been subject to roughly 3% or 4% employment taxes and subjecting it to a higher employment tax. In the case where someone already earning the FICA limit operates a sideline business, that business profit if earned in an unincorporated business is subject to employment taxes of roughly 3% to 4%. But if that person incorporates and elects Subchapter S status, the employment tax rate on the part of the profit that gets extracted as wages will equal at least 10% or 11% and possibly much higher. This weirdness occurs because the FICA, FUTA and equivalent state payroll tax limits get reset or partially reset to zero.'

Thanks!

SeattleCPA

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Re: New LLC electing to be taxed as an S-CORP
« Reply #6 on: November 08, 2018, 08:01:25 AM »
That part doesn't seem to apply to your situation.

But if you earn over the FICA limit and then you do a side hustle 1099 thing as a sole proprietorship or LLC treated as a sole proprietorship, you pay either (roughly) 3% or 4% Medicare or Obamacare tax.

If you earn over the FICA and you do a side hustle as an S corporation, you really need to pay out some of the S corp's profits as shareholder-employee wages so your 1120S return doesn't flag you for an audit. On those wages, in the end, the employeR will pay 7.65 % and the employeE will pay either 3%-ish or 4%-ish Medicare or Obamacare.

And then the S corp also triggers FUTA and SUTA taxes probably.

The upshot of all this: You need critical mass in order to make the S corporation thing work. It's not a way to Save $1K or $2K in SE taxes. It's a way to save $10K or $20K.