S Corp Vs LLC Tax Benefits: Everything You Need to Know
S Corp vs. LLC tax benefits are not much of an issue, as S corporations and LLCs have nearly identical tax requirements that involve paying lower personal tax rates or corporate tax rates.3 min read
S Corp vs. LLC tax benefits are not much of an issue, as S corporations and LLCs have nearly identical tax requirements that involve paying lower personal tax rates or corporate tax rates.
Information About S Corporation Versus LLC Tax Benefits
- Owners often choose the LLC business structure because of its flexibility in the way it operates. An LLC protects the personal assets of the owner from losses, debts incurred by the company, and court rulings, and avoids the double taxation C corporations are subject to.
- S corporations also protect the assets of the business owner from corporate liability by passing the income through to members by way of dividends. By doing so, the corporation avoids double personal and corporate taxation.
- The Internal Revenue Service (IRS) classifies businesses as S corporations, C corporations, sole proprietorships, or partnerships. The IRS does not have a tax classification for LLCs, so they are taxed as another type of business.
- Single-member limited liability companies are taxed by the IRS automatically as sole proprietorships. On the other hand, limited liability companies with multiple members are taxed as partnerships.
- LLCs have the option to be taxed as either S corporations or C corporations.
- If an LLC chooses to be taxed as an S corporation, it can save money on both Medicare and Social Security taxes.
- A member of an LLC who reports business income and expenses on his personal income tax and pays the tax due on company profits is considered to be self-employed. He or she is responsible for the taxes due on both Medicare and Social Security.
- While an LLC owner reports salary and any remaining business profit on his or her personal tax return and pays the Social Security and Medicare taxes on the profits, an S corporation, along with its owner, pays taxes on the owner's salary only. The remaining profits are not included, so the owner does not pay Social Security or Medicare taxes.
- The IRS is clear that every business will qualify to use the S corporation tax structure. Single-member LLCs will usually qualify to choose the S corporation tax structure, except under the following conditions: a nonresident alien is the owner, the limited liability company is a foreign entity, or the LLC is structured as a partnership or corporation.
- Multi-member limited liability companies with more than 100 members are not eligible to be taxed as S corporations.
- If considering changing to S corporation taxation, you should first determine what a reasonable salary would be for the type of job you do.
- As an LLC, if the profits earned by the business are greater than the reasonable salary you can expect to earn, changing to an S corporation tax structure may save you money.
- An LLC can change its status during the tax year preceding the year the change is to take effect. The first two and a half months of the current year are an approved period for making the change.
- The owner of an LLC pays the business's tax on his personal tax return. This tax is computed based on the percentage of ownership.
- An S corporation pays the working owner a reasonable salary. After subtracting the owner's salary as a deductible expense, any remaining profit or loss will then be passed to the owner to be filed on his or her personal tax return.
LLC and S Corporation Similarities and Differences
- Both LLCs and S corporations provide limited liability protection. This means business debts and liabilities will not be the responsibility of the owner(s).
- S corporations and LLCs are considered separate legal entities.
- S corporations file business tax returns, whereas LLCs must file business tax returns if there are multiple owners.
- LLCs have no limitations to the number of owners, also referred to as members. S corporations are limited to no more than 100 owners or principal shareholders.
- S corporations can only be owned by U.S. citizens or permanent residents. LLCs may be owned by non-U.S. residents and non-U.S. citizens.
- S corporations, in general, pay more taxes than LLCs. This is due in part to payroll taxes and state corporate taxes.
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