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LLC - Self Employment tax

N

NY 986

Well-known Member
I am curious as to if anybody here runs their farm or business under an LLC and if they think there is an advantage in terms of tax savings or a disadvantage? Events in the family are making a change in the business structure a necessity not too far in the future.
 
Uh---compared to what?

The purpose of a Limited Liability Company is, as the name implies, to limit the exposure of its partners to the liabilities of the company. It is not to get preferential tax treatment. An LLC files a partnership tax return just like an ordinary partnership, and its members pay taxes of their shares of the company's profits.

I'm sure one of our attorneys here will do some hair-splitting, but that's my understanding.
 
What I am wondering is if the net operating pretax income is subject to both tax on the corporation then what is distributed as salary out of the net operating income is then taxed again. Let's say that the net operating income is 50,000 dollars before any income taxes. In turn let's say that out of that 50,000 dollars 25,000 dollars is paid as salary. Is the 25,000 dollars taxed more than once such as once with the corporation then again as paid salary?
 
No the $25,000 would be deducted by the corporation as an expense leaving it with a remaining income of only $25,000 instead of $50,000.
 
Bingo, Mark.

An LLC is a state sanctioned entity intended to limit businiess liability (limited liability company).

For tax purposes, a single member LLC can be taxed as a sole proprietorship or as an S corp (pass through).

A multiple member LLC can be taxed as a partnership or as an S corp.

That said, do not be deceived into believing that an LLC, Corporation, etc., will protect personal assets from any and all business activities.

Dean
 
I guess I am having trouble wrapping my head around how the self-employment tax comes into play. The accountant I talked to made it sound like an additional tax which did not sound right.
 
The self employment tax is the same as what the employer pays for SS and medicare tax on wages. Whether you pay SE tax on the income, or a company you own pays you wages and you each pay your share of the taxes its about the same.
 
LLCs and Subchapter S corporations are not taxed directly. Rather, the partners/shareholders are taxed on the profits of the company.

Now, you mention "salary". So you could receive salary from the LLC as an employee, or receive distributions from the company as a shareholder, or both. If you receive a salary, there's no question about taxes: you must pay tax on that income and FICA (SS/Medicare) as well. The company as your employer must match your FICA tax.

If the company makes a profit on its passive income (e.g rent), you will pay income tax on your share of that profit. There is no FICA tax on passive income, either for you or the company.

Now if you have self-employment income as an LLC member, you will have to pay income tax and self-employment tax. The self-employment tax covers both the employee and employer shares of FICA.

In theory, the taxes the IRS collect on your business and its employees should be the same whether it's an LLC, a partnership, or just you as an individual self-employed person. At this point I'm pretty well over my head, so I'll let someone else step in and set matters straight.
 
if you are an owner of an LLC, monies you receive from it are called "guaranteed payments" and can be to compensate you for labor, use of capital, or both. those payments will be listed on the K-1 given you by the LLC, and you will be taxed on your 1040 as self-employment income.

If there is a surplus of funds after the LLC has received revenue, paid expenses, and paid guaranteed payments, the residual is credited to each owner's (owners are called members) capital account. The individual pays taxes on that money the same way, even though the cash stays in the LLC's bank account. It can then be dispersed some time in the future, and the capital account is debited accordingly.

as far as tax advantage- the important question is compared to what? compared to a partnership or sole proprietorship, the taxes will be exactly the same.

don't know a whole lot about s corp, but there is the advantage of not having double taxation if comparing to a c corp.
 
Your wrong on that one. If the LLC shows income of $50,000 no matter if it pays its members all of it in salary or none of it, it is still $50,000 in income and is taxed as that. The LLC does not pay any taxes on that $50,000, the members do. So if it is given as a salary, that salary is taxed on the member. If it is profit, it is profit to the member and is taxed as such. I've been in an LLC for the last ten years and it has never paid any taxes. As a member I do though. It all gets sorted out in the K1's that the LLC must file with the IRS.
 
(quoted from post at 14:36:44 04/12/14) I guess I am having trouble wrapping my head around how the self-employment tax comes into play. The accountant I talked to made it sound like an additional tax which did not sound right.
Click to expand...

The accountant is right. Because I own the farm and take deductions for it I have to pay a tax for being "self employed". It's not a huge amount because I don't actually make much, but it's still another punishing tax that takes more of what I earn because I prefer to do something rather than sit on the couch drinking beer.
 
I am not a lawyer.

As I understand an LLC, it limits the liability of non-operating partners. Let's say you and your brother own a farm. He lives in another state and works in an office, and you farm. You blow through a traffic light in the farm's grain truck, hit a car, tip over, and slide into a daycare. Your brother can lose his share of the farm, but nothing else. You, on the other hand, can (and probably will) lose everything. He as a non-operating partner has limited liability, you as the operating partner have unlimited liability.

But like I said I am not a lawyer.
 
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