I have a W-2 income and own an LLC (pass-through taxation) and a C Corporation (not pass-through). If my LLC pays my C Corporation for services rendered, will that lower my overall taxes by reducing my LLC + personal income which is taxed at ~38% but the tax rate for the C Corporation is lower at 20%?
You'll need to sign in or create an account to connect with an expert.
Is your LLC a single-member LLC? If so, it's not a pass-through entity, it's a disregarded entity. As far as income tax is concerned, a single-member LLC doesn't exist. It's just you. You and the LLC are one and the same.
Are you the only owner of the C corporation? Who would actually perform the services that the C corp provides to you? Does the C corp have any employees? (An employee gets paid wages and gets a W-2 at the end of the year.)
I don't think your proposed scheme will work. If you pay the C corp for services that you perform as an employee of the C corp, then part or all of the money that you pay comes back to you as taxable wages on your W-2. That doesn't reduce your overall tax at all. (Remember that the LLC is disregarded. It's just you paying the C corp.)
If you pay the C corp for services that you perform without getting paid, it doesn't pass the smell test. The transaction has no valid economic substance. It's just a tax evasion scheme. The IRS will see through it pretty quickly.
To benefit from the lower corporate tax rate, the money has to stay in the corporation. As soon as you pay it to yourself as either wages or dividends, it becomes taxable income to you at your regular tax rate. Since the corporation has already paid tax on it, your are actually increasing the overall tax.
I agree with @rjs. to get a tax deduction for payments to the Corp there has to be a valid business reason, the payments have to be reasonable for the services it performs and if it's you performing the services you would have to take a reasonable salary. Your best route is to confer with a tax planner who would look over your numbers to see what avenues are available to lower your taxes overall - ie income and payroll taxes. perhaps electing S-Corp for the LLC which might be able to save you enough in taxes to make it worthwhile or mayb even discontinue the LLC and do what the LLC is doing but as a C-Corp.
Still have questions?
Make a postAsk questions and learn more about your taxes and finances.
ashughes
Level 1
se5u
New Member
pcow05
Level 1
lori3
Level 1
rory-christian
Level 1
Did the information on this page answer your question?
You have clicked a link to a site outside of the TurboTax Community. By clicking "Continue", you will leave the Community and be taken to that site instead.