New llc S-Corp deadline tomorrow?

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Topic Author
middleclassish
Posts: 5
Joined: Fri Feb 01, 2019 4:42 pm

New llc S-Corp deadline tomorrow?

Post by middleclassish » Thu Mar 14, 2019 5:36 pm

(I posted this in the investing forum by mistake so am reposting here.)I’m confused about the rules for forming an llc in New Jersey ( solo- no partner) and then filing to be taxed as an S- corp. From what I’ve read, the deadline is tomorrow (March 15) to register as an LLC, but S-corp designation can be made retroactively. Can anyone confirm this? Also, how easily reversible are these decisions? From what I’ve recently read, I think ( but am not certain) that this could save me significant $ by lowering my self-employment tax, but it’s not absolutely clear. I know I’d be hiring a CPA to do the ongoing filing. I’ve been trying for the past week to get feedback from local accountants with experience in this area but haven’t heard back. (It’s their busy season.) With the deadline tomorrow I’m wondering if I should just file the llc application myself, assuming it’s reversible. Advice appreciated.

pshonore
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Re: New llc S-Corp deadline tomorrow?

Post by pshonore » Thu Mar 14, 2019 6:36 pm

The tax filing due date for an existing S-Corp is 3/15 (30 days earlier than most other tax filings). Totally unrelated to creating an LLC or an S-Corp.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: New llc S-Corp deadline tomorrow?

Post by Spirit Rider » Thu Mar 14, 2019 7:06 pm

An LLC is a state chartered business entity not a tax status. An LLC can be a sole proprietorship, partnership or S-Corporation. There is no deadline for creating an LLC, because you are not changing the tax status. However, obviously if you want an LLC electing to treated as an S-Corp, you have to create the LLC first.

It is the election to be treated as a sub chapter S corporation that establishes either a corporation or LLC to be treated for tax purposes as an S-Corp. Normally, you should elect to be treated as an S-Corporation no more than two (2) months and fifteen (15) days after the start of the tax year. For calendar year corporations, that is March 15th (3/15). However, relief is routinely granted for late elections with reasonable cause. Just about any rational reason will suffice, including CPAs being busy.

The bigger question is why do you even think you need an LLC let alone an S-Corp. I feel confident that the majority LLCs created and/or S-Corps elected are; unnecessary, provide no real benefit and are often counter-productive:
  1. Will your primary employment's W-2 Box 3 SS wages + your potential S-Corp shareholder-employee's W-2 Box SS wages will be >= the SS maximum wage base (MWB) (2019 = $132,900)? Do NOT elect an S-Corp it will cost your MORE in FICA taxes than SE taxes you would pay as a sole proprietor.
  2. If this is your only source of earned income and your W-2 wages will be < the SS MWB or the above is not true, then an S-Corp may save you sufficient FICA taxes or SE taxes to make sense.
  3. If your W-2 Box 3 SS wages will be >= the SS MWB, are a specified service trade or business SSTB and your taxable income is <= the QBI range, your QBI deduction will probably be higher with a sole proprietorship and in most cases will more than offset the savings on the Medicare only portion left of FICA.
  4. If your W-2 Box 3 SS wages will be >= the SS MWB, you are not an SSTB, and your taxable income will be above the QBI range, is it almost mandatory that you elect to be an S-Corp. Otherwise, no W-2 wages, no QBI and no QBI deduction.
You need to keep in mind that an S-Corp shareholder-employee must pay themselves a "reasonable compensation". The IRA will be even more on the lookout for people reducing their compensation to increase their distributions, because an S-Corp's QBI is based on their distributions.

Also, if you are not an SSTB, and your taxable income will be above the QBI range, your QBI is limited to 50% of your W-2 wages. So such an S-Corp will want their W-2 wages >= 2X their distributions.

Bottom line. Don't be in a hurry, an S-Corp is no slam dunk and may even be counter-productive.

Topic Author
middleclassish
Posts: 5
Joined: Fri Feb 01, 2019 4:42 pm

Re: New llc S-Corp deadline tomorrow?

Post by middleclassish » Sun Mar 17, 2019 9:37 am

Thanks. I appreciate the info and advice.

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ohboy!
Posts: 76
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Re: New llc S-Corp deadline tomorrow?

Post by ohboy! » Sun Mar 17, 2019 9:54 pm

Spirit Rider wrote:
Thu Mar 14, 2019 7:06 pm
An LLC is a state chartered business entity not a tax status. An LLC can be a sole proprietorship, partnership or S-Corporation. There is no deadline for creating an LLC, because you are not changing the tax status. However, obviously if you want an LLC electing to treated as an S-Corp, you have to create the LLC first.

It is the election to be treated as a sub chapter S corporation that establishes either a corporation or LLC to be treated for tax purposes as an S-Corp. Normally, you should elect to be treated as an S-Corporation no more than two (2) months and fifteen (15) days after the start of the tax year. For calendar year corporations, that is March 15th (3/15). However, relief is routinely granted for late elections with reasonable cause. Just about any rational reason will suffice, including CPAs being busy.

The bigger question is why do you even think you need an LLC let alone an S-Corp. I feel confident that the majority LLCs created and/or S-Corps elected are; unnecessary, provide no real benefit and are often counter-productive:
  1. Will your primary employment's W-2 Box 3 SS wages + your potential S-Corp shareholder-employee's W-2 Box SS wages will be >= the SS maximum wage base (MWB) (2019 = $132,900)? Do NOT elect an S-Corp it will cost your MORE in FICA taxes than SE taxes you would pay as a sole proprietor.
  2. If this is your only source of earned income and your W-2 wages will be < the SS MWB or the above is not true, then an S-Corp may save you sufficient FICA taxes or SE taxes to make sense.
  3. If your W-2 Box 3 SS wages will be >= the SS MWB, are a specified service trade or business SSTB and your taxable income is <= the QBI range, your QBI deduction will probably be higher with a sole proprietorship and in most cases will more than offset the savings on the Medicare only portion left of FICA.
  4. If your W-2 Box 3 SS wages will be >= the SS MWB, you are not an SSTB, and your taxable income will be above the QBI range, is it almost mandatory that you elect to be an S-Corp. Otherwise, no W-2 wages, no QBI and no QBI deduction.
You need to keep in mind that an S-Corp shareholder-employee must pay themselves a "reasonable compensation". The IRA will be even more on the lookout for people reducing their compensation to increase their distributions, because an S-Corp's QBI is based on their distributions.

Also, if you are not an SSTB, and your taxable income will be above the QBI range, your QBI is limited to 50% of your W-2 wages. So such an S-Corp will want their W-2 wages >= 2X their distributions.

Bottom line. Don't be in a hurry, an S-Corp is no slam dunk and may even be counter-productive.
#1. Can you help me understand better?

Two years ago I had gross income of $200k so LLC taxed as s-corp was no brainer. For 2018 I paid myself $45k for the year in w2 salary and paid myself $55k passive income dividend. Is it still worth having the llc s-corp?

Spirit Rider
Posts: 10033
Joined: Fri Mar 02, 2007 2:39 pm

Re: New llc S-Corp deadline tomorrow?

Post by Spirit Rider » Sun Mar 17, 2019 11:12 pm

ohboy! wrote:
Sun Mar 17, 2019 9:54 pm
Spirit Rider wrote:
Thu Mar 14, 2019 7:06 pm
  1. WillWhen your primary employment's W-2 Box 3 SS wages + your potential S-Corp shareholder-employee's W-2 Box SS wages will be >= the SS maximum wage base (MWB) (2019 = $132,900)? Do NOT elect an S-Corp it will cost your MORE in FICA taxes than SE taxes you would pay as a sole proprietor
#1. Can you help me understand better?

Two years ago I had gross income of $200k so LLC taxed as s-corp was no brainer. For 2018 I paid myself $45k for the year in w2 salary and paid myself $55k passive income dividend. Is it still worth having the llc s-corp?
When you have primary W-2 SS wages >= the SS MWB and supplemental income as a sole proprietor, only the 2.9% Medicare portion of the SE taxes apply.

However, every W-2 employer including an S-Corp must deduct/pay the full 7.65%/7.65% up to the SS MWB. It does not matter if the MWB has already been reached at another W-2 employer. The employee can get the excess 6.2% SS employee share of FICA refunded to them on their Form 1040, but the employer's 6.2% share of FICA is never recoverable.

Therefore, while a sole proprietor will pay only 2.9% on 92.35% of net profits, an S-Corp 2% shareholder-employee will pay 15.3% - 6.2% = 9.1% FICA on their W-2 wages. An S-Corp 2% shareholder-employee is required to pay themselves "reasonable compensation". In almost all cases, an S-Corp shareholder-employee in this scenario will pay more FICA taxes than SE taxes they would pay as a sole proprietor.

The no brainer is that you should almost never use an S-Corp if your primary W-2 SS wages are >= the SS MWB.

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