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theplayer11
01-28-2010, 09:37 AM
not as much as some sites will have you believe. It's not as simple as taking the difference between your net income from business and taking salary as s-corp. My quick calculations on my scenario,LLC filing as S-corp, RI resident. My accountant likes to use the 50/50 rule in declaring salary.

Example: On $120k net income from business

SE tax on $120k(x.9235 x .153) = $16,955
minus 1/2 SE deduction $8,477@ 25% = $2,119

Total SE tax = $14,836


with taking $60k salary, $60k distributions(filing as s-corp)

SE tax = $9,180($60k x 15.3%)
- Payroll taxes(TDI, Unemployment Ins) @ .038 x $60k = $2,280
- Franchise tax - $500
- Yearly filing fee - $50
- Payroll service - $465

= $12,475

That's a $2,361 savings only . Plus I will have higher accountant fees the first year..Plus the added paperwork. Worth it? Sure, I would say any savings make it worth it..but make sure you are making a high enough net income from your business or you could possible be losing money.

Business Attorney
01-28-2010, 10:53 AM
Also, if you are making less money you may have a much harder time arguing that 50% of the owner's take is "profit." You have to pay a reasonable salary. If an employee doing the same job would make $50K and the business only throws off $55K to the owner, the owner would have difficulty convincing the IRS that his salary was only $27.5K and his dividend was also $27.5K

Evan
01-28-2010, 11:03 PM
S-Corp savings are often overstated... and being an LLC in RI also subjects you to the same $500 minimum business tax, which you didn't include.

In RI, the 1.2% TDI that is deducted from your paycheck is deductible on your federal 1040 Schedule A. The other two taxes are employment security (a variable rate depending on your business), and the job development fund.

As a RI employer as well, you also need to have worker's compensation insurance, unless you elect out of it with the state. Many just don't have it, but if you are caught, the penalties are stringent.

But there are costs associated with running payroll, and preparing the 940/941, and RI equivalents, plus the RI TX-17. If you have employees, adding you to the payroll isn't that much different. If you're just a one-man shop with no employees, then you feel a bit more of the burn, because the payroll expense never existed before.

In Rhode Island, if your net income is about $50,000 or higher, an S-Corp can present you SOME tax savings. Inevitably, at some point, it wouldn't matter because social security has a maximum limit.

But there can be considerable tax savings if you have some fringe benefits you take advantage of. For example, if you open a SEP-IRA, your corporation can contribute up to 25% of your W2 wages. This is usually more than the 20% if you were a sole proprietor or an LLC.

As for higher accountant fees during year one -- you generally do with any business entity. If we are to take on any client seriously, we want to make sure that things are accounted for properly and that we can identify any ways to save you tax dollars.

theplayer11
01-29-2010, 11:22 AM
Evan..a...just noticed you are from RI, that explains the detailed response.

With husband wife LLC filing as s-corp, do we have to have worker's comp in RI?. How would we opt out?

The RI employment security and Job dev. taxes are not deductible...correct.

We currently contribute to SEPs, but not up to the max., so I don't see an advantage in that area at this time. They are currently entered on line 28 of adjusted gross income(1040)...would that change with the s-corp? Would they have to be taken from wages now?


Evan..another question.....I've read on a few sites that a partnership could enter guaranteed payments to partners and that would be the only amount subject to SE tax. Does that make sense? If so, why bother filing as an S corp..I can just keep filing form 1065 with only the guaranteed payments to partners subject to SE tax?..the rest would be distributions, just like an s-corp?

Evan
01-29-2010, 06:52 PM
There is an election you can make with the Department of Labor, and a form is available on their website. Officers of the corporation can opt out. If you have any employees though, you MUST carry it.

RI ES and JDF taxes ARE deductible, but on your 1120S. The TDI is withheld from your pay as an employee, and is ALSO deductible, but on 1040 Schedule A, under state income taxes.

For an S-Corp, SEP contributions are expenses to the corporation, and would be on the 1120S, and not your personal 1040. But you cannot take a SEP contribution UNLESS you pay a salary. So if you pay $0 in salary, your SEP contribution is $0 x 25% = $0.

As for partnership question -- GP's ARE subject to SE tax. It's essentially a salary. The remainder net income MAY be subject to SE tax, depending on what type of "partnership" it is, and the interest. GENERAL partners have UNLIMITED liability, and pay SE tax. LIMITED partners have LIMITED liability, and are considered investors, and do NOT pay SE tax.

General and limited interests only exist in limited partnerships, limited liability partnerships, or LLCs. General partnerships do NOT limited partners. The distinction is that the entities I listed in the beginning all have to be registered with the state. If you're a general partnership, you do not.