SE Tax Savings Example for Single Member LLC vs S-Corp

[stevie0040]

I am considering going from Single Member LLC to S-Corp for tax purposes while still keeping the SM-LLC status (form 2553). I've seen various SE tax savings examples online but the problem is they all assume that around $50K (FICA taxable) is a "reasonable" salary to the owner and the rest being profit (FICA nontaxable). So I've seen where if the income is $100K and $50K is salary, there is an S-Corp tax savings of roughly $7.5K (~ $50K X 15.3% FICA). Again, that is for 100K in net income and I'm assuming that our 2% FICA tax break won't last past next year.

However, what if I'm not comfortable stating $50K is a reasonable salary especially if the business income is say around $150? Say if I make the salary $100K and $50K is profit. My calc shows:

LLC FICA Calculation (from Form SE of 1040)
===============
2010 Business Income: 150,000
SS Tax Rate (up to $106.8K): 12.40%
SS Tax (up to $106.8K): 13,243
Medicare (2.9% of 92.35% of all $150K): 4,017
Total FICA Tax: 17,260

S-Corp FICA Calculation
==================
Salary: 100,000
Business Profit: 50,000
Tax Rate (up to $106.8K): 15.30%
Tax for $100K: 15,300
FICA on Profit: 0
Total FICA Tax: 15,300

So the tax savings in S-Corp in this scenario is $1,960. Still a savings but is it worth the additional reporting, paperwork, accounting/legal fees? For $50K salary, the savings would be $9,610. But is $50K reasonable when the business income is $150K, or $250K for that matter? If you play around with the numbers enough you realize that if you put your salary near the FICA max base ($106,800) the tax savings would only be the Medicare portion (2.9% x 92.35% = 2.7%) of the biz income. Is my conclusion correct? I realize that some may think that it’s foolish to put the salary near the FICA max but you just never know what the IRS would do. Thanks for looking.

[Evan]

You are correct that the savings aren't always as pronounced. There are still "legal" reasons why having an S-Corp may be beneficial, and other tax benefits that one may enjoy as an S-Corp which also sway's individuals.

The effective 2.7% of savings does become significant when the income continues to grow. The savings will continue to be more pronounced as Congress continues to seek ways of raising the SS limit as well. They're also trying to figure out ways to make the earnings from the S-Corp also subject to SE tax which would effectively make no tax difference. But like many things, there are lots of bills and ideas out there, and none have gained sufficient traction to worry about yet.

[stevie0040]

Thanks Evan for the insight. It's good that others have analyzed the numbers and kept up to date with possible changes. I say we might as well take advantage of tax situations while they last.

[tennisboy]

I tried to send you this PM but I'm new so it didn't let me:

I just joined this and am wondering the same thing. About to start a business from my Sole Proprietorship and wondering if I should go LLC, LLC as S-Corps or full S-Corps (what's the real difference between the last two anyway?). Probably going to take in $75K in salary and do the rest (about 150K) as a distribution.

Did you decide what you are going to do? I'd love to trade notes. Thanks.

[lucas.bowser]

I believe the standard is reasonable salary for a comparable position, not compared to business income. So, I would think you should be able to meet that burden relatively easily depending on what you do. I would contact the Bureau of Labor Statistics for your state, who should be able to help you come up with a market salary for your position. You'll need to have a comparable job title/responsibilities and probably a few other metrics for your company. With that, they should be able to give you a supportable market salary. If you want to be safe you can tack 10% on top of that.