Thank you, Steve! That makes sense. I realized I calculated total taxable income, but forgot to add back my self employment tax liabilities! Even considering 199A deductions, S corp still makes sense.

Way awesome advice and I just filed 2553 on 3/15!

Thank you for your site and advice!
Annie

Your LLC can be an S corporation, so you don’t want to think of LLCs and S corporations as “different choices.” That’s a first thing to know.

Another thing: You will be able to contribute more to a pension with an LLC taxed as a sole proprietorship or with a true sole proprietorship, but you’ll probably save more money with an S corporation. Restated another way, the permanent payroll tax savings an S corporation gives you are way better than the temporary income tax deferral a bigger pension contribution gives you.

Thank you for the very useful information on this website. I have been looking for information like this, and finally I lucked out with google and found you.

I have been contemplating LLC vs. LLC as S-corp. With an LLC, it seems I would be able to contribute more to the solo 401 K (employer contribution, 25% of profits), vs. with an S-Corp, it would be 25% of W2-wages. If my business makes $100000 a year, and has $5000 expenses excluding my wages, and if my goal is to minimize tax, which one of this makes more sense?

Here is my calculation:
As an LLC, net profit = $95000. Self employment tax would be $14440. To calculate max employer contribution, I take 1/2 of $14440 (1/2 of self employment tax deductible = $7220) and subtract that from $95000 = $87780. I also assume I can only contribute 20%, instead of 25% to the solo 401K (because of the circular math problem), so I can contribute $17556. My taxable income will be $70224 (87780-17556). Assuming a 30% tax rate, my tax is $14044 fed tax + $14440 self exmployment tax = $28485

If I have an S corp, and W2 wage to myself is $40000, with $55000 as distribution, then SE tax would be $ 6080. The max I can contribute to solo 401K is 25% of $40000 = $10000. I also assume that all of self employment tax is deductible, both on the corporation and on the individual side (not sure if that is correct). My total taxable income would be $78920. Assuming a 30% tax rate, fed tax would be $23676, and then I add back SE tax of $6080, my total tax bill would be $29756.

So in this situation, having an LLC and filing as an individual is basically the same as having an LLC as S corp, tax-wise?

Please let me know if I am on the ball park?

Many many thanks!
Annie

Without more detail, I can’t give you much help… but it would seem funny to me to go back and do payroll for 2015 and 2016 at this point, if that’s what you’re asking.

Yes, you need to pay reasonable compensation to your shareholder-employees and it sounds like you didn’t do that in past years. (You want to do this from this point forward.)

But at this stage, it sort of seems like you don’t go back in and fiddle with already filed returns. I’d be thinking about issues like the penalties for your late payroll tax deposits, costs of redoing a bunch of returns, restarting the statute of limitations on returns, etc.