I’ve read through the old posts, other web sites, and spoke to the IRS. Do I have this right?
LLC with subchapter S election. Just to get the numbers to show what I want, lets pretend I made 300k and decided a reasonable salary to pay myself was 100k. Here’s how I think it would be taxed:
94200 of my salary - Taxed at 28% (or applicable tax bracket) plus 15.3% for medicare/soc sec (7.65% paid by LLC and 7.65% paid by the “employee” OUCH!
5800 (the remaining salary) taxed at the 28% plus 2.9% for medicare (1.45% paid by LLC and 1.45% paid by employee) Social security no longer gets deducted
Then, lets say I give myself a distribution of 10k. That would only be taxed at the 28% No Soc sec, no medicare.
Also, the LLC can start by being taxed as a partnership but the S subchapter taxation can be elected at any time. Say, 5 years from now. Now, I understand there is a deadline for filing the form 2553 to make the S election in that particular calendar year you file it but I’m not worried about that for a few years.
WHEW! Do I have it right? BTW, I will be doing fix/flips.
almost.
you’ve paid yourself 100k. an LLC taxed as partnership or S-corp would pass thru the remaining 200k of LLC income to be taxed at your marginal rates, which will now be in the 33% bracket.
however, by paying yourself the salary, the $200k will NOT be further subject to the SE tax IF and ONLY IF you are taxed as an S-corp.
If you did not pay yourself the salary, or you are choosing partnership taxation, the entire $300k would be taxed at 33% for income plus the SE.
distributions of income from a partnership or S-corp are not taxed. the income is taxed when earned, not when the cash is distributed.
Thank you for your reply!
I do realize it will be taxed at the marginal rate but was so focused on getting the numbers right on that first 100k (for the example) that I missed the rest. Hey, who needs that 200k anyway :o
This looks like the way I need to go. LLC taxed as partnership for now and then elect the S taxation later when I make more money. Looks like I need to get out the calculator and the tax bracket rates to do some figuring on where that change should be.
“distributions of income from a partnership or S-corp are not taxed. the income is taxed when earned, not when the cash is distributed.”
I’m sure it is simple but I can’t seem to wrap my head around that one. Could you please give me an example of “taxed when earned”? Thanks so much!
12/31/06 the LLC sells something for 200k profit and keeps the cash. let’s assume it’s ordinary income, not passive or capital.
the LLC is being taxed as a partnership. partnership is a passthru entity. the 200k goes on a K-1 from the partnership and ends up on your tax return, taxed at your marginal rate plus self employment tax. you personally pay the tax April 15, 2007.
the entire $200k of cash is still inside the LLC.
May 1 2007, the LLC makes a distribution of cash to you of $50,000. The LLC has no other activity for calendar year 2007.
On your 2007 tax return filed in 2008, you will report and pay tax on zero income from the LLC. You are not taxed on the distribution because that income was previously taxed when the income was earned in 2006.
you also need to distinguish between the different income types.
rental income is passive and not subject to SE when passed through.
flip income is ordinary income and is subject to SE.
income from sale of a rental is capital, and falls under capital gains rules, not subject to SE. since income retains its character upon passthru, you will need to remain aware of what type of income is being earned by the LLC to make sure your entity and tax assumptions are correct.