Understanding LLC and S Corp Taxation
Typically, an LLC taxed as a sole proprietorship pays more taxes and S Corp tax status means paying less in taxes. By default, an LLC pays taxes as a sole proprietorship, which includes self-employment tax on your total profits. How can an LLC pay less taxes? One way is by taking advantage of a new tax law that allows small businesses to snag a 20 percent deduction if your taxable income is below certain thresholds.
Choosing the Right Business Structure
Do you know what type of business structure is better for taxes – LLC or S Corp? As entrepreneurs, we all want to maximize our profits and minimize tax liability, but the decision can be overwhelming with considerations such as asset protection, legal liability, and tax implications.
The LLC S corp election can be done by filling out a form 2553, which allows a company to be taxed as an S corp. This tax status can save money on employment taxes by distributing profits to its members and any passive shareholders.
LLCs, S Corps, and Tax Benefits
An LLC is a limited liability company that offers protection to the owner(s) from personal liability for debts that a business might incur. As an S Corporation owner, you can pay yourself a reasonable salary and still receive certain tax benefits.
Anyone starting a business should consult a tax professional for advice on which structure best fits their goals, while understanding the factors that typically influence such decisions.
For hold rental properties, a default LLC tax structure is generally better than an S corp due to the nature of rental income being considered passive and not subject to self-employment tax.
The Tax Classification Dilemma for LLCs
What is the best tax classification for an LLC? By default, an LLC pays taxes as either a sole proprietorship or partnership. An LLC can also elect to be taxed as S-corporations or C-corporations to potentially reduce the overall tax burden. The choice between S-corp and C-corp can depend on goals like asset protection, legal liability, and future business expansion plans.
Should Your LLC be Taxed as an S Corp?
Before determining if your LLC should be taxed as an S Corp, you need to consider whether you prefer business profits to be taxed at the personal income tax rate or at the corporate tax rate. To elect S corp status, file IRS Form 2553 by the specified deadline.
LLCs can provide flexible ownership while offering liability protection suitable for many small businesses. By electing to be taxed as an S Corporation, the income of the LLC can be distributed between salary and distributions, which can result in significant tax savings.
Finally, to change your LLC tax status to S-Corp, file a 2553 form with the IRS attached to a 1120S return, which is required to be filed annually by all S Corporations.
For those unsure about tax options like sole proprietor, C Corp, and S Corp taxation for an LLC, it is essential to understand the paperwork required, the LLC status, and how taxes are managed. Consulting a professional is often a wise step for finding the best tax structure for your business.