Q&A: LLC vs. S-Corp

There is a lot of confusion about the difference between an LLC and an SCorp, and the first thing to know is that an LLC is a legal entity, while an SCorp is a tax filing classification.

When you first start your LLC you will most likely still file taxes as an individual but you can also opt to file as an SCorp without changing your business entity types. Why would that matter? Well, as your business grows, so will your tax bill. In my geographic area, many CPAs recommend that once you start consistently having a net profit of about 40K it's time to start considering this shift and consulting your CPA. Here is how this seemingly small change can save you on your taxes. As a schedule C Filing LLC you pay self employment taxes on your net profit. The current rate is 15.3% If you move your filing to SCorp, you must pay yourself a “ reasonable salary” and that will be taxed at the 15.3 rate. However, all income above that reasonable salary, you can take as a distribution or dividend. Distributions of up to $40K per year have a 0% tax rate. Here is a super simplified example: if my business nets $50K as an LLC, filing as an individual, I would pay $7650 in federal taxes. But if I am an LLC filing as an S-Corp with that same net, I can pay myself a reasonable salary of 30K, and take 20K in distributions and I will pay $4590 in federal taxes.

Taxes are complex and this decision will be influenced by other factors in your personal financial situation, so it is wise to consult your CPA before taking the leap. It's also important to note that there are some added costs such as payroll software to manage your payroll, payroll taxes and more CPA time for an additional form filing. But most of the time, this small change can save you thousands of dollars in taxes each year.

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