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Can an LLC be Taxed as an S Corp

Form 8832, Entity Classification Election

Yes, it can. An LLC can be taxed as an S Corp, assuming it qualifies for S Corp taxation status. An LLC can also be taxed as a C Corporation for that matter. This makes an LLC a very flexible business type.

Option 1: LLC electing to be treated as a Corporation

A. Single Owner LLC:

If the LLC has only one owner, the IRS will automatically treat the LLC as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832, Entity Classification Election).

B. LLC Owned by More than One Person:

If the LLC has two or more owners, the IRS will automatically treat the LLC as if it were a partnership unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832, Entity Classification Election).

Option 2: LLC electing to be treated as an S CorpForm 2553 Election by a Small Business Corporation

An LLC may elect S Corp tax treatment by filing IRS Form 2553 (Form 2553 Election by a Small Business Corporation). However, sometimes the LLC must file both Form 8832 (see Option 1 above) and Form 2553.

To determine whether your LLC can file Form 2553 alone, or whether Form 8832 must also be filed, see page 1 of the Instructions to form 2553 or talk with an LLC attorney in your state.

 

Tips for an LLC Taxed as an S Corp:

Electing to have your LLC taxed as an S Corporation involves a couple procedural changes in paying and filing your taxes.

1. Quarterly Filings for an LLC Taxed as an S Corp

Keep in mind that if your business is treated as an S Corp, it must pay estimated taxes. But this inconvenience is often offset by the tax benefit of an S Corp (self-employment tax savings).

2. Income Taxes at the End of the Year

Also, an S Corp must file different income tax forms at the end of the year.

Shareholder-employees will receive two tax documents from the S-Corporation at the end of the year: a W-2 wage statement (income as an employee) and a Schedule K-1 statement.

3. No Self-Employment Tax for an S Corp Owner-Employee

Shareholder-employees of an S-Corp (including an LLC taxed as an S Corp) do not pay Self-Employment Tax because their wages are reported on a W-2, with Social Security and Medicare taxes already withheld. By contrast, the owner of an LLC that is taxed as a partnership or sole proprietorship (not an S Corp) does pay Self-Employment Tax. Self-Employment Tax is figured at the end of the year on Schedule SE via Form 1040.

© 2012, Bruce McFarland. All rights reserved.

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3 Comments

  1. January 18, 2013    

    Thanks for shearing this great post .It is a great comment about LLC tax service or tax services online

  2. August 5, 2014    

    Thank you for the information. Are there any benefits for a single owner LLC to file as a S corp? Without any shareholders or employees, would a single owner LLC need to worry about reporting wages with a W2 and withholding any Social Security or Medicare taxes?

  3. August 6, 2014    

    A single member LLC is reported to the IRS on Schedule C… Basic and quick, Sole proprietors are not W-2 wage earners, and as such would not have a W-2. Should one go through the motions to become taxed as an S-Corp, The IRS dictates that an owner/shareholder be paid reasonable compensation for working in the company. This would involve wages and in turn, with-holdings.

    I am available to discus this in length with you if you like. You can email me at bruce@lrtaxprep.com.

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