When selecting an entity type for your business, such as an LLC or a corporation, you’ll need to think about self-employment taxes and their implications. Below is some advice to help make the issue clearer, and should you need further guidance, you can consult with an entity management firm:
LLCs and self-employment taxes
Generally, sole proprietors or independent contractors like dentists and lawyers offering services to the public must pay self-employment taxes, and members of LLCs pay, or don’t pay self-employment taxes based upon a number of conditions. For more detailed guidance about these conditions, seek help from an entity management firm.
LLC partners and self-employment tax
If an LLC partner performs a trade for the company and derives an income from it, such as consulting or accounting, they will be subject to self-employment taxes. These are more commonly known as general partners, while limited partners are not subject to self-employment tax, as they are considered as deriving income from capital investment, rather than from any services they may have performed.
While some degree of ambiguity remains surrounding self-employment taxes for LLC members, the IRS or a trusted entity management firm will have the most up-to-date answers, and you will undoubtedly find it helpful to consult with them.
Should you incorporate as an S Corporation or an LLC?
Because of the confusion surrounding self-employment taxes for LLC members, it can be tricky to know whether you should incorporate as an S corporation or an LLC. If you choose an S corporation, you can avoid the 15.3% self-employment tax, as profits are not subject to these, instead they’re ‘passed through’ to the shareholders individual income tax. Under an S corporation, only salaries are subject to self-employment taxes, while under an LLC, there are certain deductibles allowable that may be of benefit for a partner.
Corporations and self-employment taxes
If you’re the owner of a corporation, on the other hand, you can avoid paying self-employment taxes by not taking any money out of the business. However, this may be difficult to abide by, as paying out all earnings as salary, is the primary way to avoid double taxation of dividends as the owner of a corporation.
It is true though, that a corporation can let its earnings build up, giving this type of entity a distinct advantage over LLCs.
Does one or the other really have an advantage?
As is the case with most business decisions, what type of entity you opt for will depend upon your individual circumstances, and the only way to get a non-biased and well-rounded picture of the options, is by consulting with an entity management firm.
To learn more about self-employment taxes for LLCs, you can check the latest information from the IRS, or take advantage of a free initial consultation with an entity management firm.