samsquatch
Participating member
- Location
- SE MN
Thanks for the good summary. I hadn't looked into S Corp at all, just straight "single member" LLC. Nice to know the differences.
Contract Climbers LLC, S Corp, or Sole proprietor? Why?
- Thread starter Flex Abednego
- Start date
samsquatch
Participating member
- Location
- SE MN
Is it though? If you have the time, you can learn anything..
And to those people that say "There's no way I have time for that" I say: I'm sure that is what you believe.
Last Thanksgiving we all shared what we where thankful for. For some reason, my answer just came to me. "Time" was my answer.
Gather your thoughts, research the situation, make a plan but be open to surprises; and you can do anything you set your mind to.
Steve Connally
Been here much more than a while
- Location
- Suffolk, Virginia
Keep in mind I am a LLC filing as an Scorp. I didn't have to incorporate. Just change the filing status with the IRS. I didn't want to incorporate
samsquatch
Participating member
- Location
- SE MN
Ah, right-o. So then, you're getting into employment payroll taxes? And worker's comp?
See, filing as single-member LLC, "disregarded entity" I get to avoid the payroll taxes & worker's comp headaches - but I don't have any employees I only "contract" them, much like OP.
Whether you do payroll taxes or pay tax on the draws you take as a single member LLC you still pay tax. As an employee you pay 1/2 the FICA, which is essentially what you are doing in a S corp, You as a single member LLC filing as a sole proprietor pay both sides of the FICA. Only extra headache is doing payroll, which is easy to pay a service. You aren't avoiding any taxes you are actually paying more this is why people file as a S corp. A little confusing and an extra step, but the more revenue you generate the more this helps. As far as workmans comp goes, that has nothing to do with filing as a S corp, as the owner just as with subcontractors you aren't required to have workmans comp, at least in my state. This is how I understand it.
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To add to the confusion, a corporation gets taxed twice the stockholders get taxed and the corp gets taxed, but has a higher level of liability protection in court due to the fact that corps have been around a long time and have more precedent.
So Steve, I think we are very close on our understanding and advantage of LLC filing as a S corp. But I am pretty sure you still pay SS but only 1/2 as an employee would where someone filing as a sole proprietor pays both sides. Distributions or draws are taken from the company ,true, but that company money is taxed, that's where write offs come in. In my case I pay quarterly. You are right you pay yourself as little as reasonable, in my case a salary per month to keep your payroll tax low, FICA and all that. You cant escape taxes they get you one way or the other, but how and when you pay can make a difference. The details may seem small but as revenue goes up these details become more important. This conversation is based on our understanding of a confusing subject, so I will repeat to everyone to talk to a CPA not just an accountant/bookkeeper someone who understands and is up to date on current tax law. Also I recommend to people to take a few business classes. I did 2, 3 hour classes at the library by a tax lawyer. I learned a lot, boring as hell though. We work hard for our money so a little effort to keep more seems worth it. Appreciate the conversation
RyanCafferky
Been here a while
- Location
- Hood River, Oregon
I would go LLC. It gives you protection and you can file taxes as an S-corp or a sole proprietor. The latter will be cheaper and easier during tax season. It really depends on how much you make though.
samsquatch
Participating member
- Location
- SE MN
Distributions from S Corp are not subject to FICA, but are still subject to income tax on your Schedule E.
Problem becomes, if you are the only member of the s corp, it's hard to justify that you have distributions that should not be counted as salary. The IRS would look at ALL distributions going to one person, and ALL salary going to one person and they would say "same-same".
Oh, and when you file an s corp, you have to do corporate income taxes - PITA for a tree climber like me, I would think -- I might even consider hiring a CPA for that..
Based on my research, this is what it comes down to:
However, if you run a larger business, with your "reasonable salary" closer to the SS wage base, it makes little sense to consider filing as s corp because you're already paying close to the max in SS taxes.
Problem becomes, if you are the only member of the s corp, it's hard to justify that you have distributions that should not be counted as salary. The IRS would look at ALL distributions going to one person, and ALL salary going to one person and they would say "same-same".
Classifying 100% of S corporation profits as salary might be necessary for a sole owner S corporation with few or no employees, since in that context virtually every dollar of profits really is attributable to the active employment efforts of that owner/employee.
How An S Corporation Reduces FICA Self-Employment Taxes
How an S corporation can reduce FICA taxes, the criteria for qualifying for FICA-exempt S corporation dividends, and why an S corp may not always be best.www.kitces.com
Oh, and when you file an s corp, you have to do corporate income taxes - PITA for a tree climber like me, I would think -- I might even consider hiring a CPA for that..
Based on my research, this is what it comes down to:
- if your business income will be less than $132,900 (SS wage base for 2019)
- and your business owner "salary" will be substantially less than the $132,900
- and you have employees
However, if you run a larger business, with your "reasonable salary" closer to the SS wage base, it makes little sense to consider filing as s corp because you're already paying close to the max in SS taxes.
Steve Connally
Been here much more than a while
- Location
- Suffolk, Virginia
I agree with all of the above statements. I am not subject to WC as I am the only employee owner. As so far as the distributions....................... when I make that money I pay taxes on it. When I take it as a distribution I do not pay another tax on it if the IRS feels I am drawing a "reasonable salary". Those IRS salaries can be found online published by them. I need to dray about 26k a year to be considered reasonable. I will be conservative on the distributions though. I have to, I have a 400k loan to pay back. Other ways around it are corporate 401k, investment strategies and other sheltered payouts that I'll need someday. Seriously, if I pay myself 30k a year why would I want to pull out 50/60/100k in distributions? We all know nobody is gonna get rich doing tree work. I'll take some distro and make some extra payments and then save for crane #2. I will live comfortably and let the biz grow. The ss taxation is only on my half of the payroll as stated above. It's a significant savings over time. Also I forget the number but the IRS gives a credit to the first $XXX earned and doesn't count that towards your yearly taxable total. My accountant is a shark. He's so smart and when he explains this stuff to me I barely understand. I would suggest as others have, find a good accountant to advise you, do your taxes and help determine your quarterly taxes and rates. Fin somebody who manages money, big money, high income clients. They are much sharper than those everyday accountants. You're gonna pay double, like lawyer rates, but it's worth the investment.
Steve, funny you made the shark comment. My CPA has a giant picture of a shark on his wall in his office. My CPA is legit and totally by the book, he keeps me out of trouble. He is fairly expensive, but very sharp and up to speed on current tax code. He is worth every penny. I would expect a businessman like yourself to have a keen since of attention to detail.
- Location
- Home of the New Jersey Devils
My accountant is an ex-irs agent and he still goes to seminars about new codes. He fou d one that saved us 17% right off the top this year.
evo
Been here much more than a while
- Location
- My Island, WA
That’s huge! What was it if you don’t mind sharing?
samsquatch
Participating member
- Location
- SE MN
You guys have profit? What's profit, sounds nice..
- Location
- Home of the New Jersey Devils
I don't remember the code but will ask. It was something to the effect of "If you met less than $317k you get a credit of 17% immediately as a tax break..." or something.
Steve Connally
Been here much more than a while
- Location
- Suffolk, Virginia
Thats one of the reasons I file as a S Corp. Qualifies me for that where I wasn't qualified as an LLC
