LLC or S Corporation and Payroll
In this article
- My company is an LLC; should I pay myself through payroll?
- Should I file Form 8832 to be treated as an s-corporation?
- Why would I want to be treated as an s-corporation?
- Should my entity be an s-corporation or c-corporation?
My company is an LLC; should I pay myself through payroll?
Did you or your CPA make an "s-election" by filing Form 8832 with the IRS? LLC's are very common small business organizational structures for their flexibility, simplicity and legal structure. However, for income tax purposes if you do not make an "s-election" by filing Form 8832; then you should not pay yourself via payroll as an employee. Members of an LLC that are not treated as an s-corporation for tax purposes see all profits or losses flow back to their personal tax returns. The members would be subject to self-employment taxes on the profits and should plan accordingly, but they would not be required to treat the payments to themselves as employee wages and subject them to employee taxes such as unemployment.
Should I file Form 8832 to be treated as an s-corporation?
This is an item to discuss in depth with your CPA shortly after forming your LLC as you have a limited time frame to file Form 8832 with the IRS. Generally speaking; where the profits generated do not exceed the member's reasonable compensation test, it may not be beneficial to be treated as an s-corporation. S-corporations come with added costs; such as the requirement to file both a personal and corporate tax return. Please discuss with your CPA before deciding.
Why would I want to be treated as an s-corporation?
All profit generated by an LLC that hadn't made the "s-election" would be considered "Schedule C" income and reflected on the member(s) income tax returns. The entirety of which would be subject to self-employment tax even if the profit exceeds a reasonable wage test for the work the member's performed. Thus, if you are building a business and creating something of value beyond your ability to sell your own services, then you may start to see yourself as a shareholder of a company that pays distributions. Shareholder's of s-corporations are both employees of the corporation and shareholders of company stock. Wages paid as an employee would be subject to employment taxes, but profits generated and paid to a shareholder as distributions would be considered K-1 income that would not be subject to self-employment taxes only income taxes. Owing taxes means you've been making money and your doing something right, but it might also be a wise time to consult a tax adviser.
Should my entity be an s-corporation or c-corporation?
There are many factors that can go into this decision, so be careful. Still, the vast majority of small businesses that we come into contact with are treated either as LLC's or s-corporations; not c-corporations. Still, there may be many reasons why a c-corporation may be well suited for your business. For instance, if you intend to seek outside investors (venture capital funding), the c-corporation route is your likely destination.
- IRS.gov - Paying Yourself
- IRS.gov - S Corporations
- IRS.gov - S Corporation Employees, Shareholders, and Corporate Officers
- IRS.gov - S Corporation Compensation and Medical Insurance Issues
- IRS.gov - Business Expenses
- IRS.gov - Wages and Compensation for S Corporation Officers FS-2008-25
- Colorado.gov Employer Services FAQ, Premiums Question 6