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Do I pay myself as an employee or a contractor for LLC with S Corp election

I provide services through a platform that allows me to do data entry and customer service for other companies. I was required to be an LLC with S corp election in order to provide services. 

 

I'm the only member of my LLC. Do I need to pay myself as a W2 employee or as a 1099 contractor? I do plan to have contractors under my LLC in the future. I'm in the state of Arizona if that helps. 

2 Replies
Anonymous
Not applicable

Do I pay myself as an employee or a contractor for LLC with S Corp election

with an S-Corp election you will file an 1120S.   since in effect it's a corporation that you own and work for, the IRS would classify you as an employee. Employees generally don't work for free, so the IRS  would want to see you take a reasonable salary.    if you have health insurance there are ways to handle so you get an "above-the-line" (reduces adjusted gross income).  handle it wrong and at best it would be treated as a medical expense reported on schedule A which might not produce any tax benefit.

 

this link will give you guidance on reasonable compensation and how to handle health insurance 

 

 https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

 

i would also suggest using a tax pro to prepare the first year return.      there are a lot of federal and state tax and other laws that affect your business. TT does a good job of going thru the tax issues but many people are surprised when they are faced with fines for failure to comply with non-tax laws.        

Level 15

Do I pay myself as an employee or a contractor for LLC with S Corp election

As a shareholder in the S corp, you are an employee of the S corp, not a contractor.  Because you are an employee of the S corp, the S corp must issue to you a Form W-2 to report your compensation from the S corp.

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