LLC S Corp Election Worh it for $40k?

[Crazydude]

My wife and I have a business with profits at almost $40k annually. Since we've just hired a part time employee, I'm now making the jump to LLC status, but on the fence about whether to elect S Corp status for he LLC. I understand the differences and the advantage the S corp status gives, but with only 40k in annual profits, is it really worth it?

Even if I could take a "reasonable" salary of maybe 35k, Id only be saving the SE tax on 5k. And in this (Etsy) business, my income is directly a result of how much work I put into it, and not how much capital I have invested. So I'm not even sure if I could take less than 100% of profits as income.

Any thoughts?

[Daleth]

Following.

[CareCPA]

It depends. If you are already paying extra for the LLC return to be filed, and the S Corp return would not cost extra, it wouldn't hurt.
If it is a single-member LLC and you aren't already paying for the reporting requirements of a partnership, it's probably not going to save you enough to be worth the extra cost at those levels.

[Laserjet3051]

My wife and I have a business with profits at almost $40k annually. Since we've just hired a part time employee, I'm now making the jump to LLC status, but on the fence about whether to elect S Corp status for he LLC. I understand the differences and the advantage the S corp status gives, but with only 40k in annual profits, is it really worth it?

Even if I could take a "reasonable" salary of maybe 35k, Id only be saving the SE tax on 5k. And in this (Etsy) business, my income is directly a result of how much work I put into it, and not how much capital I have invested. So I'm not even sure if I could take less than 100% of profits as income.

Any thoughts?

I certainly understand your logic and concur with you as to the division between capital and labor, but as an owner/investor in this business (aside from your role as laborer), are you not entitled to compensation for the risk you are undertaking with this business? Where such compensation is distinct from your compensation as laborer? I couldn't accurately put a $ amount on such a split, but this logic does seem reasonable.

[FrugalHeights]

Hi all,

On this topic of "is electing S corp worth it?", I wonder if there is a way to estimate costs of this election.
I recently spoke with a small business CPA, and he was of the opinion that S corp for a single member LLC is not worth the hassle if you are not making ~$80k or more a year. His rationale was the following:
Of $80k, $40k is salary and $40k is dividends. On $40k of dividends, the member saves $6k on tax. However, the cost of having S corp (filing fees, payroll fees, tax accounting help) is ~$1.5k. Thus, there is still a benefit of $4.5k. His point was that this benefit gets progressively smaller as the income gets smaller, but the cost of ~$1.5k remains. (I am in Ohio).

My assumptions for cost components of S-corp:
1) S-corp annual fee (tax-filing-related, state dependent)
2) Setting up/ running a payroll (software subscription)
3) Once a year Accountant fees (tax prep & filing)

Anything else? Can anyone point me to a resource online or can anyone (who has S corp) outline what you guys pay for it? Can any of these costs be reduced (via DIY, etc.)?

Thank you!

[SeattleCPA]

I love S corporations. Just love them...

But I don't think it's worth it (yet) for you to do this. Your savings will equal roughly 15.3% of whatever part of the $40K of profit you can not treat as wages.

You'll pay probably $1K to $2K a year in extra tax prep fees and taxes in order to run the business as an S corporation.

In end, you won't save enough to make it worthwhile, in my opinion.

Again, I love S corporations... but in your situation, that election seems like overkill at this time.

P.S. This longer post at my blog goes into gritty detail about how the math works in your situation. You might find it useful:

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

[cchrissyy]

My assumptions for cost components of S-corp:
1) S-corp annual fee (tax-filing-related, state dependent)
2) Setting up/ running a payroll (software subscription)
3) Once a year Accountant fees (tax prep & filing)

Wait, if you just hired an employee, then it's not fair to consider payroll services as a cost of going with the S corp. You'll have those no matter what corporate structure you choose.
Also, won't you have annual accounting costs anyway, now that it's an LLC?

If so, I think you only really need to consider item 1 on your list above

[FrugalHeights]

Wait, if you just hired an employee, then it's not fair to consider payroll services as a cost of going with the S corp. You'll have those no matter what corporate structure you choose.
Also, won't you have annual accounting costs anyway, now that it's an LLC?

If so, I think you only really need to consider item 1 on your list above

Just to clarify: I do not have an employee, Crazydude has. My question assumed 1-member LLC.
As a 1-member LLC (not S corp, but sole proprietorship currently), I do not have any payroll services and I do not need accounting help since I can just do Schedule C myself. Not a big deal as I understand.
I apologize, Crazydude, that I took a liberty to expand your topic to a broader "S-corp or no S-corp" question. I hope it is ok with you.

Regarding Item 3: As I understand, to get accountant help for preparation of tax documents for S-corp is much more expensive than for preparing Schedule C (for those who do not DIY). I may be wrong. I will see this year how it goes.

Am I missing something?

[SeattleCPA]

Just to clarify: I do not have an employee, Crazydude has. My question assumed 1-member LLC.
As a 1-member LLC (not S corp, but sole proprietorship currently), I do not have any payroll services and I do not need accounting help since I can just do Schedule C myself. Not a big deal as I understand.
I apologize, Crazydude, that I took a liberty to expand your topic to a broader "S-corp or no S-corp" question. I hope it is ok with you.

Regarding Item 3: As I understand, to get accountant help for preparation of tax documents for S-corp is much more expensive than for preparing Schedule C (for those who do not DIY). I may be wrong. I will see this year how it goes.

Am I missing something?

You want an accountant to do the 1120S tax return. And often people need help with the 941s, W2/W3, and 940--at least to get the maximum tax savings.

I would think, rough guess, you're looking at around a grand for the 1120S...

And payroll, unless you DIY it, will probably be $500 a year. Maybe more.

And then finally you will have some new payroll taxes.

[FrugalHeights]

Thank you SeattleCPA. This is very helpful!
When you mentioned 1120S, 941s, W2/W3, and 940, you were referring to S-corp, correct? not to sole proprietorship?

I read your Evergreen Small Business blog post - you estimate $1k-$2k of costs related to S-corp. Good ballpark to use to estimate readiness for S-corp election.

[SeattleCPA]

Thank you SeattleCPA. This is very helpful!
When you mentioned 1120S, 941s, W2/W3, and 940, you were referring to S-corp, correct? not to sole proprietorship?

I read your Evergreen Small Business blog post - you estimate $1k-$2k of costs related to S-corp. Good ballpark to use to estimate readiness for S-corp election.

The 1120S return is the corporate tax return for an S corporation.

The 941 is the quarterly payroll tax return you file with IRS to tell them how much tax you've calculated and withheld from employee payroll amounts.

The W2 and W3 is, well, you know...

The 940 is the federal unemployment tax return.

You need to file those payroll returns if you have employees. A sole proprietorship might not have employees (the proprietor isn't an employee). An S corporation would even if only person working was the shareholder-employee.

[cchrissyy]

Oh sorry FrugalHeights, I mistook you for the OP!

I had a sole proprietorship that grew to a corporation. never was an LLC. It was a C corp the first year because we missed the filing deadline for the S election, and then an S corp for all the years after that.

My annual tax preparation cost about $1200. You definitely shouldn't do the 1120s return yourself even if you are experienced with your personal taxes and schedule C and everything. It's very different.

As for payroll, I paid annually for quickbooks payroll service, which was easily integrated in QB, obviously, not just for paychecks, paystubs, direct deposit, but more importantly, E-filing the various state and federal reports, making those electronic payments on time, and sending out W2s and 1099s and everything.  I had an accountant set it up for me properly and from there it was very easy to do myself.

[SeattleCPA]

... It was a C corp the first year because we missed the filing deadline for the S election, and then an S corp for all the years after that.

The statute says you need to make an S election by the 15th day of the third month of the first year you want to operate as an S corporation, but people should know the IRS lets wiggle out of that deadline. You therefore should never assume that missing the deadline means you can't operate as an S corporation for that year. Probably you can...

[FrugalHeights]

that is great to know! I was worried about it a bit...

[Crazydude]

I've attached images of my Paychex quote. But basically:

Payroll processing
Taxpay
New hire reporting
...etc
_________
$35.50 per pay period (2 p/ month)

Annual W-2/1099: $65 + $6.50 p/ employee

Included with the above are:
prepare and file fed and state W-2s with W-3 recap.
Form 940 Fed Unempl Tax Return
Payment of quarterly taxes/returns

This comes out to a total of: $936.5

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

[SeattleCPA]

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Well, no, not additional tax forms... I.e., you need to do payroll which means the federal forms we've talked about... note that the payroll service will take care of them, but the state where you operate will possibly have some equivalent state quarterly payroll tax returns...

One thing that I wonder about, though, based on your query above: Do you have the LLC set up yet? You can't have an S corporation unless you have an eligible entity like a corp or LLC... Specifically, for you to run your business for the entire year as an S corp, you needed to have an LLC in place on 1/1/2017.

If you don't have an LLC in place, you can do that ASAP, maybe get the entity set up today or tomorrow, and then make the election. In that case, you business operates as a sole proprietorship for the first 24 or 25 days of the year... and then it operates an LLC taxed as an S corporation for the rest of the year.

[Crazydude]

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Well, no, not additional tax forms... I.e., you need to do payroll which means the federal forms we've talked about... note that the payroll service will take care of them, but the state where you operate will possibly have some equivalent state quarterly payroll tax returns...

One thing that I wonder about, though, based on your query above: Do you have the LLC set up yet? You can't have an S corporation unless you have an eligible entity like a corp or LLC... Specifically, for you to run your business for the entire year as an S corp, you needed to have an LLC in place on 1/1/2017.

If you don't have an LLC in place, you can do that ASAP, maybe get the entity set up today or tomorrow, and then make the election. In that case, you business operates as a sole proprietorship for the first 24 or 25 days of the year... and then it operates an LLC taxed as an S corporation for the rest of the year.

It is not set up as an LLC yet. But I'm filing the paperwork today.  I was under the impression I had until March or so to make the S Corp. election.

[protostache]

I've attached images of my Paychex quote. But basically:

Payroll processing
Taxpay
New hire reporting
...etc
_________
$35.50 per pay period (2 p/ month)

Annual W-2/1099: $65 + $6.50 p/ employee

Included with the above are:
prepare and file fed and state W-2s with W-3 recap.
Form 940 Fed Unempl Tax Return
Payment of quarterly taxes/returns

This comes out to a total of: $936.5

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Gusto is significantly cheaper and I believe it to be a better product (I use it for two businesses). For one employee it's $45/mo for any number of payrolls you want to run, and all of the end of year reporting is free. This is an affiliate link that gives you and me a $200 Amazon gift card once you pay your first invoice (basically a 40ish% discount on your first year).

[SeattleCPA]

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Well, no, not additional tax forms... I.e., you need to do payroll which means the federal forms we've talked about... note that the payroll service will take care of them, but the state where you operate will possibly have some equivalent state quarterly payroll tax returns...

One thing that I wonder about, though, based on your query above: Do you have the LLC set up yet? You can't have an S corporation unless you have an eligible entity like a corp or LLC... Specifically, for you to run your business for the entire year as an S corp, you needed to have an LLC in place on 1/1/2017.

If you don't have an LLC in place, you can do that ASAP, maybe get the entity set up today or tomorrow, and then make the election. In that case, you business operates as a sole proprietorship for the first 24 or 25 days of the year... and then it operates an LLC taxed as an S corporation for the rest of the year.

It is not set up as an LLC yet. But I'm filing the paperwork today.  I was under the impression I had until March or so to make the S Corp. election.

You do have until March 15 to make the election if it's effective on 1/1... but election can't be effective before you have an entity to make the election for.

P.S. Sadly, there are some tax "practitioners" who either don't know this rule or ignore it... but that's a bad idea even if you don't want to follow the law. I think an invalid election might easily unravel later on if some government agent came in and looked at it.

[Crazydude]

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Well, no, not additional tax forms... I.e., you need to do payroll which means the federal forms we've talked about... note that the payroll service will take care of them, but the state where you operate will possibly have some equivalent state quarterly payroll tax returns...

One thing that I wonder about, though, based on your query above: Do you have the LLC set up yet? You can't have an S corporation unless you have an eligible entity like a corp or LLC... Specifically, for you to run your business for the entire year as an S corp, you needed to have an LLC in place on 1/1/2017.

If you don't have an LLC in place, you can do that ASAP, maybe get the entity set up today or tomorrow, and then make the election. In that case, you business operates as a sole proprietorship for the first 24 or 25 days of the year... and then it operates an LLC taxed as an S corporation for the rest of the year.

It is not set up as an LLC yet. But I'm filing the paperwork today.  I was under the impression I had until March or so to make the S Corp. election.

You do have until March 15 to make the election if it's effective on 1/1... but election can't be effective before you have an entity to make the election for.

P.S. Sadly, there are some tax "practitioners" who either don't know this rule or ignore it... but that's a bad idea even if you don't want to follow the law. I think an invalid election might easily unravel later on if some government agent came in and looked at it.

But I can make the LLC this week, then make the election and have it effective as of this week (or whenever the LLC becomes official)?

[SeattleCPA]

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Well, no, not additional tax forms... I.e., you need to do payroll which means the federal forms we've talked about... note that the payroll service will take care of them, but the state where you operate will possibly have some equivalent state quarterly payroll tax returns...

One thing that I wonder about, though, based on your query above: Do you have the LLC set up yet? You can't have an S corporation unless you have an eligible entity like a corp or LLC... Specifically, for you to run your business for the entire year as an S corp, you needed to have an LLC in place on 1/1/2017.

If you don't have an LLC in place, you can do that ASAP, maybe get the entity set up today or tomorrow, and then make the election. In that case, you business operates as a sole proprietorship for the first 24 or 25 days of the year... and then it operates an LLC taxed as an S corporation for the rest of the year.

It is not set up as an LLC yet. But I'm filing the paperwork today.  I was under the impression I had until March or so to make the S Corp. election.

You do have until March 15 to make the election if it's effective on 1/1... but election can't be effective before you have an entity to make the election for.

P.S. Sadly, there are some tax "practitioners" who either don't know this rule or ignore it... but that's a bad idea even if you don't want to follow the law. I think an invalid election might easily unravel later on if some government agent came in and looked at it.

But I can make the LLC this week, then make the election and have it effective as of this week (or whenever the LLC becomes official)?

Yes. BTW, you will get most of the year to operate as an S corporation. And a tip: What you ought to do probably is pay enough of your expenses in the period before you become an S corporation so that your sole proprietorship make only a wee bit of profit.

[BlueHouse]

I've attached images of my Paychex quote. But basically:

Payroll processing
Taxpay
New hire reporting
...etc
_________
$35.50 per pay period (2 p/ month)

Annual W-2/1099: $65 + $6.50 p/ employee

Included with the above are:
prepare and file fed and state W-2s with W-3 recap.
Form 940 Fed Unempl Tax Return
Payment of quarterly taxes/returns

This comes out to a total of: $936.5

This does not include filing for LLC status...the primary service here is payroll.

So onto S Corp election...are there additional tax forms to be filed quarterly/yearly if I choose this election? Stuff that's possibly not included above?

Gusto is significantly cheaper and I believe it to be a better product (I use it for two businesses). For one employee it's $45/mo for any number of payrolls you want to run, and all of the end of year reporting is free. This is an affiliate link that gives you and me a $200 Amazon gift card once you pay your first invoice (basically a 40ish% discount on your first year).

WTF?  I use Paychex and have been paying more than $70/month for a 1-person payroll.  I want to say I've had it with them, but the thought of changing anything that works right now is a little overwhelming. 

ETA:  Just reread your post Crazydude, do you have 2 pay periods per month?  if so, we're not too far apart in pricing.  But if you only have one pay period per month...why am I being charged double?