Difference Between LLC and S-Corp
“You’re Taxed Where You Do the Work”
Angela Sticca Snyder (01:24-01:27)
Finances play an essential part of any business. Every business must file tax returns and make payments on income at the state and federal level. It is necessary to document the cash flow for business analytics. In this episode, Angela talks about the difference between an LLC and S-Corp.
Part One of ‘Difference Between LLC and S-Corp’
The first thing I want to know is if you have an LLC. If you don’t have an LLC already created, you need to get one. That’s the first thing you need to do to move your business on the path of growth. So, we’re going to be talking about two different instruments today. Number one is an LLC. An LLC is something you get registered within a state.
“You’re supposed to file in all the states where you are present and earn income.” – Angela Sticca Snyder (01:47-01:53)
There’s a big misconception that where you register your business is how you’re taxed. That’s not the case. I have clients that will come to me and say that they got their company registered in Nevada. Or, in Wyoming or Texas. There are good legal reasons for that. But there’s not always good tax reasons because you’re taxed where you do the work. LLC is a limited liability company. There’s no such thing as a federal limited liability tax return. If you’re an S-Corp, how are you taxed? And that’s when I get the deer in the headlights. What I mean is if you created an LLC and you didn’t do anything different than you could be, what’s called a disregarded entity. And what that means is that you’ll file a schedule C on your return for your business activity. You’re going to be considered a partnership if you formed an LLC with an unrelated party by default without any election required. The other option is the S-corporation status. It’s regarded as a flow-through entity. A flow-through entity is where the entity itself gathers and organizes the income and expenses. But it’s passed through or flown through to the owners in the form of a K1. So, a partnership and S-Corp are considered flow-through entities. That is, the business itself will not pay income tax. The income or loss will flow through to the individual owners. They will report on their tax returns.
Many small businesses are interested in forming an S corporation. S corporation can be very helpful for a growing business. You’re required to run payroll when you select status at a top-level.
You’ve got two components of your income out of an S corporation. You have wages that come to you in the form of a W2, and that has the social security and Medicare tax on it, which is 15.3% for both the employer, which is your business, and the employee, which is you. You also get a K1, which is somewhat like 1099. It’s the other document you get to report your income. If you’re an S corporation, that income escapes the social security and medicare tax. That’s why people are so anxious to create S corporation returns.
Part Two of ‘Difference Between LLC and S-Corp’
Another rule of S corporation is that you’re required to file payroll on a reasonable basis and a generous salary. That way, you cannot avoid the self-employment tax on all S corporation income. There is no right or wrong way in which to elect the S corporation status.
“Wait until a business has made some income and it is cost-beneficial for the business owner.” – Angela Sticca Snyder (06:38-06:46)
We need to start having conversations to determine the best time once your business is netting about 40 to 50,000. Otherwise, the only person that makes out usually is the accountant like myself. For instance, let’s say you created an LLC, and we put you into an S Corporation right away, but you hadn’t started earning any income yet. In that instance, we would still be required to run payroll as a condition of the S-Corp status. We would have to file an S corporation tax return. There would be a minimal benefit to you and more filing fees that the accountant would collect.
The S corporation tax return is due one month before the standard business return. So, it is due on March 15th, and an extension would need to be filed. If you can’t make that time, the extended due date pushes it out until September 15th. You must make sure that you meet those deadlines. The penalty for failing to file by the extended due date is $195 or $200 per shareholder per month. If there’s two of you, then it’s $400 a month, and it does not end. It’s super important that you make sure that you have adequate records and file on time. Something also to keep in mind about S corporation is you are required to report the balance sheet. If your gross income is more significant than $250,000 more than likely, if you’re in an S corporation status, your gross income will be above the $250,000 if you have to report a balance sheet. Now’s the time to go ahead and get your accounting software started. So, if you’re not currently utilizing anything, now’s a great time to get going. We recommend XERO for bookkeeping and accounting software.
If your business is netting at least $40,000 to 50,000 dollars and you have one individual involved in your LLC, it’s time to chat for additional members of your LLC. Then the net income would need to rise to determine the best time for us to talk. Once we do chat, it’s super simple. We determine the state you’re located in and the state it’s best to get organized. Once we do that, then we make the election with the IRS for you to be taxed as an S corporation. Once we build that election, after many weeks or months, you will get a letter back from the IRS. It says, congratulations, we’ve approved your selection status as of X, Y, Z date. It is super important that we get a copy of that letter that you received back from the IRS. So that we can put it in your permanent file and also make sure that the correct date that we requested was accepted at the end fortunate circumstance that the date where you requested was not accepted.
How to Get Involved
Taxanista is a leading certified public accountant who offers reliable professional tax and accounting services. She is a consummate strategist. She loves listening, analyzing and developing strategic plans. Do you have bigger issues? Taxanista can help you fight off the IRS.
Angela knows how unsettling some of your struggles may be, that’s why she offers private consultations for your business and tax matters. Increase your profit by knowing your numbers. Reach out to her now. https://www.taxanista.com/