LLC Vs S-Corp
- The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 15.3% which goes toward social security and Medicare. The entire net income of the business is subject to self-employment tax.
- In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. No employment tax on dividends paid to shareholders
- The self-employment tax rate (15.3%) consists of two parts: 12.4% for social security and 2.9% for Medicare.
- First of all there is nothing such as a ‘S Corp’ for entity formation purposes. When forming an entity – the state recognizes an entity as either partnerships, LLC or Corporation. S Corp status is ONLY for tax purposes. So after you form a LLC or Corporation and get the EIN, you have to file an election with the IRS (Form 2553) to treat your entity as a S Corp. for tax purposes.
- regarding payroll, the Corp will have to pay 7.15% of the employment taxes and the rest of the 7.15% will be taken from your pay check. So effective you will be paying 15.3% from the corp. Running a payroll is not that costly and you can always signup with ADP/Paychex – who take care of the monthly/quarterly/annual filing of returns and paying payroll taxes. There charge is nominal, which again you can deduct as expense on the corp return.
- If you want a 401(k), you aren’t limited to 100% matching. If the employer is a corporation, it can contribute up to 25% of payroll; if you’re self-employed, you can contribute up to 20% of self-employment income. Those are in addition to the $15,000 you can contribute as “employee.” Note that employee contributions are subject to social security tax, but employer ones aren’t. “Payroll” or “self-employment income” is computed WITHOUT deducting employee contributions.