Tax Treatment of S Corporations
and Limited Liability Companies

Our law office can assist you in two main entity structures: the S Corporations and limited liability companies (LLC).  Both are similar in that they are “pass-through” entities for tax purposes; the income of these companies is passed through to their owners and reported on the owners’ personal income tax returns.

So what is the difference between an S Corporation and an LLC?  And which structure is right for you?

The answer depends on your own unique situation.  Generally, if operational ease and flexibility are important to you, an LLC is a good choice.  If you are looking to save on employment tax and your situation warrants it, an S Corporation could work for you.

Click on the links below to read more about the similarities and differences between S Corporations and LLCs.

 

 

 

 

 

An S Corporation’s profits are passed through to shareholders and reported on their individual income tax returns; an LLC’s profits are also passed through to members unless the LLC chooses to be taxed as a C Corporation, in which case the LLC files a Corporate Income Tax Return and pays income tax itself.

 

An S Corporation’s shareholders only pay self-employment taxes (Social Security and Medicare tax) on "reasonable" salary paid to them; LLC members pay self-employment taxes on all income of the LLC distributed to them.  In an S Corporation, the remaining income that is paid as a distribution is not subject to employment tax under IRS rules.  Therefore, there is the potential to realize substantial employment tax savings as an S Corporation.

While the potential employment tax savings may make the S Corporation an attractive structure for your business, bear in mind that there is substantial additional paperwork associated with payroll tax.

 

Both S Corporations and LLCs may take all regular business deductions allowed by the IRS, as with any other business entity.

Medical Insurance Premiums: Group Medical Insurance and Self-Employed Health Insurance premiums paid for a “greater-than-2% shareholder-employee” may be deducted by an S Corporation as long as the premium is included in gross income or wages.  An LLC, no matter the entity classification, may deduct medical insurance premiums paid as long as they are included in gross income or wages (only for shareholders who hold greater than-2% of the LLC Units if the LLC is classified as an S Corporation).

 

S Corporations, or LLCs classified as corporations, may pay up to 25% of the owner’s W-2 salary (limited to $49,000) into a SEP IRA and 100% of the payment is generally deductible.  An LLC classified as a partnership or sole proprietorship may pay up to 20% of net adjusted self-employment income or business profits (limited to $49,000) into a SEP IRA and are generally 100% deductible.

 

 


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1524 Alaskan Way Suite 101
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Harborscape Professional Building
1524 Alaskan Way, Suite 101
Seattle, Washington 98101
Telephone: 206.621.1600

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