Should I pay myself a salary under my sole proprietor LLC?

[susiefraga]

Do you recommend I pay myself a salary and file as an S-Corp for my solo-LLC to mitigate taxes? If so, what is the minimum revenue I have to bring and what is the minimum salary I have to pay myself in California so I don't have to pay so much on SS and medicare?

[Bsch4477]

You should probably have a net income of about $40,000 to make sense for having an S-corp.  You have to pay yourself what a business of your kind would normally generate. There is no figure published by the IRS but they have statistical data they use to make that judgement. 

[AR_CPA2]

Hello Susiefraga,

As a sole proprietor or a Single Member LLC, you should not pay yourself a traditional salary, instead you can take Owner Draws from your business profits.  For tax efficiency, you may elect to file a S-Corp.  In that case you are required to pay yourself a Reasonable Compensation and take additional money from the company in the form of dividends or distributions.  This allows you to avoid some of the self-employment tax on the earnings of your business.

LLC or S Corp

Thanks for participating in TurboTax's Ask the Expert event today. I hope this information was helpful!

Have an amazing day.

AR (CPA 10+ years)

[EMS0]

@AR_CPA2 in line with the question before, if I am currently a single member LLC and maybe myself as a 1099 contractor reasonable wages (per my field). Would it be helpful to file my taxes as an S Corps or file it as an LLC? The profit for this year is looking to be around or over $80,000. Thanks for your help 🙂

[AR_CPA2]

Hello EMS0,

First of all, just to clarify, if you are paying yourself as a Single Member LLC, you don't need to issue yourself a 1099 or a W-2. 

Secondly, if you are filing as S Corporation, you must give yourself reasonable compensation and issue a W-2 for that. 

Reasonable Compensation is the amount that would ordinarily be paid for like services in your field.  Reasonableness is determined based on all the facts and circumstances. 

You may draw additional amount as a distribution, and not have to pay self-employment tax on that distribution.

Thanks for participating in TurboTax's Ask the Expert event today. I hope this information was helpful!

Have an amazing day.

AR (CPA 10+ years)

[EMS0]

Hi @AR_CPA2 

I'm currently classified as an SMLLC, could I file my taxes as an S Corps an change my classification for the IRS/EIN attached as well? 

Also, can you clarify what this means? It seems really interesting. 

You may draw additional amount as a distribution, and not have to pay self-employment tax on that distribution.

Thanks for your help and time! 

[mblumenthal]

You have to apply for S-corp status on form 2553. The IRS will eventually acknowledge your election by letter or reject it. Don't hold your breath waiting for a reply, however. 

What that sentence means is that for an s-corp, the owners have to pay themselves a "reasonable" salary with all of the formalities of filing 941s, issuing a W-2 and filing a W-3 etc. Any income left over goes to the owner(s) via a K-1. This income would not be subject to payroll taxes (social security and Medicare). That's the whole idea behind the reasonable compensation issue- the avoidance of social security and Medicare taxes.

[AR_CPA2]

Hello EMS0, 

If you're currently classified as SMLLC, you will need to file a  Form 2553, Election by a Small Business Corporation, to file for S Election in order to change the classification of your entity.

Tax strategy:  Let's say your profit is 80K, assume that a person in your field gets a reasonable compensation of 50K, so the other 30K can be taken out as a distribution and not have to pay self-employment tax on it.  So the 30K distribution would only be subject to regular tax and not the Self-employment tax.

Thanks for participating in TurboTax's Ask the Expert event today. I hope this information was helpful!

Have an amazing day.

AR (CPA 10+ years)

[Terri Lynn]

Hello, EMSO!

You will not be required to obtain a new EIN.  The IRS has stated that one does not need to apply for a new EIN in any of the following scenarios:

• If you report income tax as a branch or division of a corporation or other entity, and the LLC has no employees or excise tax liability.
• If an existing partnership converts to an LLC classified as a partnership.
• If the LLC name or location changes.
• If an LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation.
• If a new LLC with one owner SMLLC, is formed under state law,and does not choose to be taxed as a corporation or S corporation, and has no employees or excise tax liability. 

As far as the statement "You may draw additional amount as a distribution, and not have to pay self-employment tax on that distribution." this means that If you organize your business as an S-corporation, you can classify some of your income as salary, and some as a distribution.  The distribution portion will only be subject to ordinary income tax, while your salary portion, will be subject to self employment tax in addition to ordinary income tax. You see when you are both an owner and an employee of an S corporation, you can receive compensation in two ways: salary and distributions. Your salary is paid for the services you provide to the company, and employment taxes are withheld from this compensation. However, as an owner, you may also receive a share of the company's profits through distributions. These distribution payments are not considered salary, so no employment taxes are deducted from them. This dual compensation structure allows an S-corp. owner/employee to receive regular income through salary while also benefiting from the company's success through profit distributions.

For more information see:

• How an S-Corp Can Reduce Your Self-Employment Taxes 
• LLC Tax Filing Rules - TurboTax 
• Limited Liability Company Taxes - TurboTax Tax Tips & Videos 

Please feel free to reach back out with any additional questions or concerns you might have!

Have an amazing rest of your day!

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