"Should I be an S corp?" is one of the questions we hear most from Los Angeles business owners. The answer depends on numbers specific to you, but the moving parts are the same for everyone.
How an LLC is taxed by default
A single-member LLC is taxed like a sole proprietorship: all profit is subject to income tax and to self-employment tax of 15.3% on earnings up to the Social Security wage base. In California the LLC also pays the $800 annual tax and, once gross receipts reach $250,000, an LLC fee.
What changes with an S corporation election
An S corporation pays the owner a reasonable salary through payroll. Payroll taxes apply to the salary, but the remaining profit passes through without self-employment tax. In exchange you take on payroll filings, a separate corporate return, and California's 1.5% franchise tax on S corporation income (with an $800 minimum).
The break-even
Savings grow with profit above a reasonable salary. Costs include payroll service, the extra return, and the California tax. For many service businesses the election starts to pay once profit is comfortably above the salary you would need to pay yourself. We calculate it for your business, because industry and salary norms vary.
Questions to ask before electing
- Can the business pay a reasonable salary and still have profit left?
- Are you ready to run payroll every month?
- Do you expect losses soon, or a sale of the business?
See our entity setup service or schedule a consultation.
By Artin Shahmirzaian, EA. General information only; not advice for your specific situation.