costs of starting a bookkeeping business llc

One downside of designating your business as an S corporation, compared to only an LLC, is that it does require additional paperwork. If an S-corp helps a business save money on taxes, why would anyone choose an LLC? Well, if you’re making as much or less than what you could make doing a similar role at another company, you can’t save money on taxes because your reasonable salary would consume the entire profit.įor example, if you’re earning $40,000 net profit, and $40,000 is a “reasonable” salary for the job, you could just stay an LLC without electing S-corp tax status. Unsure When to Choose an LLC Rather Than an S-corp That’s a lot of money just for changing your tax status to an S-corp! Which Business Structure Is Right for You? The great thing about an S-corp is that nobody has to pay FICA tax on the $30,000 dividend – saving you (in this example), $4,590 in FICA taxes. You and the S-corp must each pay 7.65% FICA tax on the salary of $45,000 for a total tax of $6,885. Use your common sense and our guide to determine a reasonable salary.īack to the example: Let’s take your $45,000 “reasonable” salary and deduct it from the net income of $75,000, which leaves you with a dividend of $30,000. But the IRS doesn’t care about that argument. Some would argue that you cannot compare a business owner to another managerial role. Ouch.Ĭonsider this question: If you were to get paid for the work you’re currently doing in another similar business, how much would they pay you? For this example, let’s say an owner would pay you a salary of $45,000 to do a similar job in a comparable business.

You’ll have to pay a 15.3% self-employment tax (FICA), which is $11,475. Let’s say your business is an LLC and earns $75,000 in net profit, which is the profit after subtracting expenses. Regardless, if there is only one owner the entire 15.3% FICA burden is ultimately borne by the owner. S-corps pay FICA taxes as payroll taxes with 7.65% coming from the shareholder/employee and 7.65% being paid by the S-corp/employer. LLCs pay FICA tax as a 15.3% self-employment tax on the owner’s tax return. Again, you choose an LLC or C-corp and then designate (also called “elect” in tax-world speak) that business an S-corp for tax purposes. What complicates matters is that online legal services often say they will register your business as an S-corp, but that isn’t what happens. Then, once registered, send Form 2553 to the IRS to indicate you’d like to tax the business as an S-corp. To receive the S-corp tax status (whose benefits we’ll explain below), you first register as an LLC or C-corp with the state you’re primarily doing business in. Again, it’s a tax status, sometimes called a tax designation. One common misconception online is that S-corp is a business structure-it’s not. In 1958, Congress created the S corporation, also called the small business corporation, so that smaller businesses could get similar tax advantages as a corporation, but without the double taxation.

We need to start with an explanation of the S-corp because the S-corp is technically not a business structure-it’s a tax status. We’re going to break down and explain these business structures as clearly as possible with information the typical small business owner needs to know.īefore we get into an in-depth explanation of the LLC vs S-corp vs C-corp, here’s a simple cheat sheet of the three business structures and what they do: What Exactly Is an S-corp?

Costs of starting a bookkeeping business llc