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Tax question for new business
Posted on 4/30/13 at 7:50 pm
Posted on 4/30/13 at 7:50 pm
I will be transitioning from w2 to 1099. I plan to set up an LLC and file as a sub s. Will have all business expenses go through the business, and pay myself a reasonable salary. I will then take distributions from the retained earnings. Any thoughts on my line of thinking?
2
Posted on 4/30/13 at 8:32 pm to BARNEYSTINSON
I'm pretty sure you can't take a salary as an LLC unless you treat it as an S Corp. you're going to pay taxes on these retained earnings whether you pay the money out to yourself or not. The business doesn't pay taxes, the owners do.
Poodlebrain will probably add a lot to the discussion.
Poodlebrain will probably add a lot to the discussion.
Posted on 4/30/13 at 8:50 pm to BARNEYSTINSON
This is a pretty standard plan for the avoidance of self-employment tax on significant amounts of s-corp income. The difference between the maximum salary subject to Social Security and the reasonable compensation you pay yourself from the s-corp will never be subjected to self-employment tax or Social Security withholding. If you assume a $50,000 annual difference and a 15% self-employment tax rate it results in a permanent savings of $7,500 per year.
Posted on 4/30/13 at 8:58 pm to Poodlebrain
Thanks for the confirmation. How does the IRS define the reasonable ccompensation?
Posted on 4/30/13 at 9:06 pm to VABuckeye
The S corp allows for tax savings via lack of employment tax on distributions. Whereas, employment tax is paid on all net income of an llc. This is my understanding at least.
Posted on 4/30/13 at 9:12 pm to BARNEYSTINSON
quote:It's a matter of facts and circumstances for each taxpayer. What is reasonable for a start-up operation may not be reasonable for an established business. The type of products or services the business provides can have an impact. Compensation can be in the form of benefits other than salary. So there are no hard and fast rules to follow.
How does the IRS define the reasonable ccompensation?
This article covers the topic pretty well. LINK
Posted on 4/30/13 at 9:15 pm to Poodlebrain
Thanks for the info and the article.
Posted on 4/30/13 at 9:37 pm to BARNEYSTINSON
I'm an LLC and for tax purposes we are treated as an S Corp. The income on the K1rolls over to me individually and I pay taxes on that amount at my individual tax rate. You see it exactly as I do.
This post was edited on 4/30/13 at 9:42 pm
Posted on 4/30/13 at 9:39 pm to Poodlebrain
OK. Read the article. So the average compensation range for my line of work in this area is 65,000. But, since it is a new business I could pay myself slightly less this year as long as I increase the salary in future years and future growth?
Posted on 4/30/13 at 9:42 pm to VABuckeye
Thanks.
This post was edited on 4/30/13 at 9:43 pm
Posted on 4/30/13 at 9:59 pm to BARNEYSTINSON
Can someone mention the negatives to electing an s corp? My cpa says that you can never go back. He also mentioned more paper work and such. I take home about 140k, but my "salary" could be in the 80's. Saving me 15% on 60k?? Or is there a cap of 115k or something on employment taxes, so I would only save 15% on about 35k??
Posted on 4/30/13 at 10:59 pm to ColdDuck
You can switch after your original filing, but you can't go back and forth between the two. I've heard as a general rule that once an LLC files as an S-Corp, they can't change for 5 years or so, depending on the circumstances.
I'm sure poodle and others know more about this, but it is possible to change in the long term.
I'm sure poodle and others know more about this, but it is possible to change in the long term.
Posted on 5/1/13 at 8:09 am to ColdDuck
quote:I wouldn't call them negatives. I would call them relative disadvantages. And many of the relative disadvantages depend on the type of business activity conducted. One disadvantage is less flexibilty and capacity to save for retirement.
Can someone mention the negatives to electing an s corp?
quote:You can always terminate an s-corp, but if you do you will have to liquidate the corporation, and that is usually a taxable event, before you can form a new LLC. The administrative costs of being an s-corp are usually more since you have to file a separate tax return and there are payroll matters to deal with.
My cpa says that you can never go back. He also mentioned more paper work and such.
quote:If you are just starting the business I think you could justify drawing less in salary than competitors might pay. Unless you have signed long-term contract(s) with customers you could lose all revenue at a moment's notice, and having a reserve to cover for such a contingency is not unreasonable. You could probably get by with a salary in the range of $60K and save on an addition $20K.
I take home about 140k, but my "salary" could be in the 80's. Saving me 15% on 60k?? Or is there a cap of 115k or something on employment taxes, so I would only save 15% on about 35k??
Posted on 5/1/13 at 10:32 am to Poodlebrain
quote:
One disadvantage is less flexibilty and capacity to save for retirement.
Can you expand on this?
Posted on 5/1/13 at 11:11 am to BARNEYSTINSON
Exactly how much free professional advice am I supposed to provide? The answers to your questions are available all over the internet. Just ask your questions to Google, and it will point you in the right direction.
Posted on 5/1/13 at 11:34 am to Poodlebrain
Thanks.
Posted on 5/1/13 at 12:10 pm to BARNEYSTINSON
quote:
Thanks for the confirmation. How does the IRS define the reasonable ccompensation?
One of the most litigated issues in tax. The IRS just can't seem to let it go.
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