Can LLC members avoid paying Self Employment tax by choosing to file as an S-Corp?

Hello!

Question:  Can LLC members avoid paying self-employment tax by
choosing
to file as an S-Corp?

Answer:  In theory it sounds good, however there are a lot of
regulations surrounding the SECA, Self-Employment Contributions Act,
whether operating as a corporation or LLC.  A LLC can file as a
corporation by filing Form 8832 with the IRS, but keep in mind to
avoid the tax as a S-corp you need to have your distributions as a
shareholder.  If you are a shareholder and officer then some of your
distributions will probably count as salary or you may be seen as an
employee.
Another way of avoiding SECA is corporations will not take a salary
from the business, here again, there is the concern of being double
taxed.

One web site I found greatly useful:
Business Owner's Toolkit
http://www.toolkit.com
Useful pages on this site include:
Self-Employment Taxes
http://www.toolkit.cch.com/text/P12_4865.asp
S-Corporation Election
http://www.toolkit.cch.com/text/P12_4725.asp
SECA Tax on Corporate Payments
http://www.toolkit.cch.com/text/P07_3114.asp
Combining the LLC and the Statutory Close Corporation
http://www.toolkit.cch.com/text/P12_4881.asp
Self-Employment Tax Exceptions in Favor of the LLC
http://www.cch.com/text/P12_4876

Internal Revenue Service
http://www.irs.gov

askacpa, The Tax Experts
http://www.askacpa.org

Good luck!

Rinn

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Request for Answer Clarification by markt-ga on 29 Oct 2002 08:30 PST

Hello, thanks for the response!

Can you be more specific as to how we can make the distributions ALL
in the form of dividends (which have no SE tax)  without any salary
distributions.  In other words, as a shareholder and officer, MUST we
pay ourselves a salary?

Thanks!

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Clarification of Answer by abigayle-ga on 29 Oct 2002 17:20 PST

Hello;

I consulted with a CPA on this one and he basically agreed with
trick-ga.  Although you can claim income as a dividend to avoid the
SECA tax the IRS will also consider any time and services contributed
to the business and you must pay self-employment on these or risk
being audited.  The tax laws are complicated, one site which may be
useful to you is http://www.askacpa.org.

Again Good Luck!!

Rinn

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Request for Answer Clarification by markt-ga on 29 Oct 2002 22:35 PST

Thanks!  Just one more quick question then I'll stop pestering...

Would the salaries paid to the shareholders be deductable from the
business's net profits?

Thanks again!

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Clarification of Answer by abigayle-ga on 30 Oct 2002 12:34 PST

It depends on the type of business.  In a LLC or S-corp all the
business's profits are taxable to the owner or partners, so no the
salaries, or guaranteed payments, are not deductable.  However, in a
C-corp corporate level taxes can be avoided by paying out dividends as
salaries, but the individual will still pay income tax and both the
business and individual still pay FICA.  One thing to be aware of is
the IRS closely scrutinizes C-corps to ensure taxes are not being
avoided by paying out dividends as salaries.
There are advantages a LLC has when considering taxes.  Half of
self-employment taxes can be deducted from the owner or partners
personal income tax returns and federal and state unemployment taxes
can be avoided completely which a corporation must pay.  Also a
business's payments to loans and lease agreements are exempt from the
self-employment tax and are another way to withdraw money from the
business.

Hope this all helps!

Rinn

I recieved a bunch of good info related to my question, but no
definitive answer to my question.  I suppose that's because sometimes
there is no definitive answer when it comes to taxes.  In truth I
don't feel all that much more informed right now.

There are no "minimum" salaries that the IRS requires you to take, but
if you don't pay yourself any salary, you may get audited.

Since the point of the corporation is to be treated separately from
you as an individual, you are supposed to pay yourself market rate for
your company's size and industry.  That said, you can obviously go
somewhat lower to minimize taxes.  I went through the same thing
recently, and my accountant recommended paying myself at least
1000-2000 a month to avoid scrutiny.  If your business is bigger,
though, you might raise that figure.

The rest can be passed through (in the case of an S Corp, without
double taxation) as a distribution or dividend.