LLC vs S-Corp

LLC’s are more flexible and require less formal documentation. But S-corps can offer certain tax advantages.

In an LLC, owners are not supposed to be on payroll – even though many are! As such, all earnings flow to the bottom line and are taxed as income on the owner’s tax returns. The owners then have to pay SE taxes (social security and medicare) at the rate of 15.3% on the net income, plus regular income taxes.

In an S-corp, the owners are supposed to be on payroll – many are not! As such, the net income is reduced by the payroll expenses to the owners. Assuming the payroll amount to the owners is “reasonable” (in the eyes of the IRS), remaining earning can be distributed and are not subject to SE taxes.

There is obviously a costs to owners being on payroll but that cost can be offset by the tax savings form having an s-corp

11/11/2019
By: Gary Grottke, CPA, Quality Back Office LLC