Are you an LLC? Why?

Do you like to pay more taxes? If so, choose to be an LLC. How is it possible that a simple, pass-through business organization can result in more taxes than its S-Corporation counterpart? It’s called self-employment tax (or SET which consists of Social Security and Medicare tax multiplied by two).


SET is 15.3% of all LLC profits and guaranteed partner payments up to $117,000 (for 2014) of income and 2.9% thereafter. For example, if you pay yourself guaranteed payments as compensation (draws) in an LLC totaling $60,000 and the LLC has a remaining profit of $60,000, total income subject to SET is $120,000 and your total SET (excluding federal and state withholding tax) totals $17,988 (15.3% of the first $117,000 and 2.9% of the remaining $3,000). However, if you are an S-Corporation, the $60,000 remaining profit is not subject to SET, therefore saving you $8,808 in taxes.

Of course, there are a few assumptions such as

  • a) your $60,000 salary is reasonable,
  • b) you, and the other owners, are eligible to be an S-Corporation, and
  • c) there are not other reasons why an LLC would make more sense.

If you are the only compensated individual in your firm, you will also have to pay payroll processing fees since you will be an employee of your S-Corporation versus being a member of the LLC where you take draws and are responsible to pay your own taxes personally. Obviously, the higher your compensation, the less benefit derived from being an S-Corporation. However, you will always pay 2.9% more since there is no limit on Medicare taxes by being an LLC.

For help with your business or to learn more tax information, visit www.mokercpa.com.

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