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Can a LLC be Taxed as a S Corp?

Form 8832, Entity Classification ElectionYes, 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.

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© 2011, Bruce McFarland. All rights reserved.

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4 Comments

  1. Russ Daniel's Gravatar Russ Daniel
    January 27, 2011    

    Don’t forget to make sure that the LLC qualifies to be taxed as an S corp – i.e. no preferred interests, disproportionate distributions, etc!

  2. Deserttaxguy's Gravatar Deserttaxguy
    March 17, 2011    

    Don’t forget to check your individual State Corp tax rates and fees. In California the LLC tax minimum is $800 plus a fee on total income. While in States with no income tax there is minimal or no extra tax.

  3. June 26, 2011    

    But, here is my question. What is the benefit to not paying self-employment tax and paying social security and medicare? The math should work out the same no matter which route you go. Plus, if you consider yourself and employee the company will then have to pay unemployment insurance to the state.

    The one way I can think of off the top of my head where being an employee and not an independent contractor of the corporation may be beneficial is if you are trying to secure some sort of personal financing. Most lending institutions ‘punish’ self-employed people through harder underwriting criteria and higher interest rates.

    Nicole :)

  4. June 26, 2011    

    Food for thought, yes. Look at it this way. as an employer, your paying half your employees SS/Med. this is a right off. Where as if you are just self employed then, the SS/Med is not a right off anywhere. There are a few other not so visible reasons. My suggestion would be to contact your Tax Accountant and with them knowing your situation (all the ins and outs then you will be able to make the decision that is best for your specific situation. Not everyone will work the same math and end up better one way or the other. it is all a mater of each individual situation.

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