The breakdown is 12.4% for Social Security tax and 2.9% for Medicare tax. Self-employment tax refers to Social Security and Medicare taxes, which total 15.3% of your net income (income minus expenses). The primary benefit of an LLC taxed as an S-Corporation is saving money on self-employment taxes. Let’s now discuss the S-Corporation advantages and disadvantages. S-Corporations are becoming very popular for small business owners (with adequate net income), but S-Corporations are also the least understood (and people usually jump into them too fast). You can have your LLC taxed as a C-Corporation by filing Form 8832.

You can have your LLC taxed as an S-Corporation by filing Form 2553 (which we’ll discuss in this lesson).There are two different ways you can have your LLC taxed as a Corporation: If you have a Multi-Member LLC (2 or more owners), then the IRS will tax it as a Partnership instead.Īlternatively, you can tell the IRS to tax you as a Corporation by filing an additional form after getting an EIN for your LLC.If you have a Single-Member LLC (1 owner), then the IRS will tax it as a Disregarded Entity/Sole Proprietorship.LLCs have a default tax status with the IRS, depending on how many members there are: Note: This lesson will focus on LLCs taxed as S-Corporations, not Corporations taxed as S-Corporations. However, an LLC can also elect to be taxed as an S-Corporation with the IRS, and is a very common tax classification made by LLCs whose net income begins approaching $75,000 to $100,000 per year. Having said that, traditionally speaking, when people say “form an S-Corp”, they actually mean form a Corporation (also known as C-Corporation) with the state, then elect for the C-Corporation to be taxed as an S-Corporation by the IRS. A better way to refer to this is “ setting up an S-Corp“.Īgain, “forming an S-Corp” simply means taking an existing entity and changing its tax status with the IRS. There is no filing in any of the 50 states to “ form an S-Corp“. I highlighted “taxed as” because that is the proper verb, not “form” an S-Corp. Meaning, you first need to form an LLC or a Corporation (making the appropriate filing with your state’s Secretary of State office), then elect to have that entity taxed as an S-Corporation with the IRS. Instead, you elect to have your already-formed entity taxed as an S-Corporation with the IRS. Therefore, you can’t form an S-Corporation. “Setting up” an S-CorpĪgain, unlike an LLC or a Corporation, which is a business entity created at the state-level, an S-Corporation is a tax entity selection made with the IRS. Their personal assets (like homes, vehicles, and bank accounts) are protected in the event of a lawsuit and cannot be used to pay off the debts or liabilities incurred by the S-Corporation.Ī lot of people use the term “forming an S-Corporation” and this causes a lot of confusion. Just like an LLC and a C-Corporation, an S-Corporation offers personal liability protection to its owners. Any income, losses, credits, and deductions flow through to the owners of an S-Corporation (called shareholders) and will be reported and paid for on their personal tax return. The S-Corporation election is made with the IRS and then “sits on top of” your legal entity either your LLC or your C-Corporation.Īn S-Corporation is a “pass through” tax entity, so it is not subject to double taxation like a C-Corporation. The term “tax entity” means it’s a tax classification status made with the IRS. S-Corp is short for S-Corporation, also known as an “S Corp”, “S Corporation”, or “Subchapter S Corporation”.Īn S-Corporation is different from an LLC or Corporation (C-Corporation) in that it is a “tax entity”, not a legal entity formed at the state-level.

Hotswitch llc