Sub Chapter S or continue with Schedule C

[terryj1]

I plan on filing a late request for a Sub Chapter S Corp tax status for my single member LLC to begin on 1/1/24 (I missed the 3/15/24 deadline). I have already began paying myself through regular payroll and am paying taxes via the quarterly 941's.

My gross revenue for 2024 is expected to be about $175,000-$200,000, with about $75,000 in deductible expenses. After the expected extra expense of $3,000 - $4,000 for tax preparation, does it seem worth the added headaches? I am 61 yrs. old and plan on funding an IRA up to the catch up maximum with any tax savings over the next 4-5 yrs. The reduced amount of SS contributions looks like they will have no effect on my SS benefit amount when I project the numbers into the benefit calculator on the SS website.

I currently file Schedule C and have no problems doing my own return, an S Corp will be outside of my abilities for tax preparation. I keep good books and have all my accounts separate from my personal with all expense records recorded and the bank & CC statements to back them up. Any advice?

[PoojaT27]

According to your post, I can see you have done thorough research into the topic. also, you have mentioned that you are on payroll and are filing the quarterly tax returns. Additionally, you mentioned you have a single member LLC.

Let's say you do not file Form 2553 for S corporation tax treatment of your LLC, in that situation you will need to retrace your steps for payroll and amend the quarterly returns to show $0 payroll for you, the reason being that a single member LLC without any elections is a sole proprietorship and a sole proprietor cannot withdraw wages. 

Let's say you file the late election on Form 2553 to treat your LLC as S corp for tax purposes, in that sitaution you are doing the right thing by taking reasonable compensation as wages from the business and then file S corporation return for 2024.

Now let's see how much may be your potential tax savings based on the information you have provided.

 I will assume that you are filing as single and the business income is the only income on your tax return.

Also, I will assume that your gross revenue is $200,000 and the business expenses are $75,000 which give a net income of $125,000 from the business.

Potential tax as a sole proprietor:

You will fall in the 22% tax bracket range which will imply income tax of approximately $14,500

and self employment tax approxiamtely $15,000

So the total tax in that situation is $29,500

Potential tax if the LLC is treated as S corporation for tax purposes:

Assumption - Annual wages of $60,000

That reduces your net income from business to $65,000

Total of employee and employer FICA taxes on your wages - $7,500

With the assumptions made so far, you will fall in 12% tax bracket range with income tax approximately $5,500

Total tax in this sitaution is $13,000

As you can see there is a difference in the potential tax in the two tax treatments of the LLC.

As you rightly mentioned, the S corporation return will be an expense for the business and there will also be unemployment tax for federal and state which you must already be paying as part of payroll tyaxes.

With the limited knowledge of your complete tax sitaution, I have made some assumptions to provide you with the approximate tax amounts.

According to the above analysis, you will save in taxes as an S corporation.

[PoojaT27]

@terryj1 in the above analysis, I need to make a change.

In the situation where you are treating your LLC as S corporation

The income tax will be approximately $15,000

And self employment tax, as previously stated, approximately $7,500

Therefore, the totoal tax will be approximately $22,500.

I hope this helps