LLC taxed as an S corp

[Rocky93]

Recently filed form 205 to form a single member LLC but haven't heard back so just preparing for the future.  Also want the LLC to be taxed as an S corp - does this mean I will eventually file both 8832 and 2553?  What is the difference in these forms?

I am forming an LLC so that I do not have to pay social security tax on all the LLCs profits, just my salary, but am reading this logic may be flawed.  Any insight is greatly appreciated.  I sell on Amazon, if that helps.

[Carl]

IRS Form 2553 is to have the IRS treat your LLC like an S-Corp *FOR TAX PURPOSES ONLY*.

IRS Form 8832 is used to elect how it will be classified for federal tax purposes, as a corporation (C-Corp), a partnership, or an entity disregarded as separate from its owner.

this logic may be flawed

Very well may be. You would be advised to seek professional help setting things up, and for your first year of taxes at a minimum. S-Corp and C-Corp laws differ from state to state, and state laws can determine how things are treated at the federal level.

[tagteam]

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@Rocky93 wrote:

.....does this mean I will eventually file both 8832 and 2553?  

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No, you only need to file Form 2553 for your LLC to be treated as an S corporation for federal income tax purposes. 

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@Rocky93 wrote:

I am forming an LLC so that I do not have to pay social security tax on all the LLCs profits, just my salary, but am reading this logic may be flawed.  

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A single-member LLC is treated as a disregarded entity for federal income tax purposes and is really no different than a sole proprietorship. As a result, you cannot pay yourself a salary with that structure. 

However, you can (and actually must) pay yourself a reasonable salary as a shareholder in a S corporation who provides services to the corporation. You can also take a distribution, as part of the net profit, from the corporation without incurring any social security tax (FICA) liability.

[Mike9241]

I agree with Carl as to conferring with a pro the first year.  the big issue is reasonable compensation. there is no definition of this in the tax laws but rather thousands of court cases.  taking a salary that is too low based on the hours and type of work can result in severe penalties. while issues of taking too much can arise, that usually only happens when there are multiple shareholders.

[Opus 17]

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@Rocky93 wrote:

I am forming an LLC so that I do not have to pay social security tax on all the LLCs profits, just my salary, but am reading this logic may be flawed.  Any insight is greatly appreciated.  I sell on Amazon, if that helps.

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This is what most people think who file as single member S-corps.  It can work.  However, it's an audit red flag, and the IRS will be very interested to know how you determined that you took a "fair and reasonable" salary for your services, and whether your "extra profits" should really be exempt from SS tax.

For example, a certain famous politician was exposed for the following arrangement: He and his wife formed S-corps for their book royalties and speaking fees, receiving more than $10 million in gross income.  They took a small salary (I think around $200K) and declared the rest of the income as dividends.  A skeptical person might argue that since the royalties and speaking fees were due entirely to the actions, notoriety and material participation of the politician, he should have taken a larger salary, and this was an improper tax avoidance scheme.  

Now, since this particular politician has powerful friends and votes for the approved policies, he probably won't get audited.  Do you have powerful friends?  If not, be careful with your S-corp salary and dividends.

There are also some drawbacks to the S corp treatment, that I am not at all qualified to discuss, but which you should review with an accountant, before making the decision.

Lastly, I think you only have 60 days from the business becoming active to file the 8832 2553, so don’t sit around waiting to decide.

[tagteam]

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@Opus 17 wrote:
Lastly, I think you only have 60 days from the business becoming active to file the 8832, so don't sit around waiting to decide.

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Correct; there are time constraints, but only Form 2553 needs to be filed if the entity is electing to be treated as an S corporation.

See https://www.irs.gov/instructions/i2553#idm139855003794080