Just got off the phone with my CPA and I'm kicking myself. Formed my LLC two years ago, been paying self-employment tax on everything, and apparently I could've elected S corp status much sooner and saved a chunk on FICA. The CPA says I can still file the election now but there's a window and I might owe back taxes. Feeling like I missed a big piece of the puzzle when I set this up. Anyone been through this? How much did the S corp election actually save you vs the extra admin hassle?
LLC Taxes
I wish I had understood the S corp election before forming my LLC
I did the exact same thing. Operated as a sole prop LLC for three years before someone casully mentioned S corp at a cookout. The savings were real but so was the payroll setup and the extra 1120-S. Make sure you run actual numbers with the CPA.
S corp election is not the magic bullet people make it out to be. Depending on your revenue, the payroll admin costs and reasonable salary requirements can eat a lot of the FICA savings. What's your net profit annually?
Reasonable saary. Say it louder for the people in the back. The IRS does not love it when you pay yourself $12k and take $150k in distributions.
Yeah fair. My situation was specific, I was netting like 90k with low overhead. After payroll costs and the accountant fees it was still worrth it but the margin got thinner than the internet calculators suggested.
The back taxes part is what would worry me. Did the CPA mention late elecTion relief under Rev Proc 2013-30? If you qualify you can sometimes get the election treated as retroactive without penalties.
Also worth asking: what state are you in?Some states have their own S corp treatment and filing fees on top of the federal stuff. California especially will hit you.
Honestly the admin headache is what stopped me. Payroll, quarterly filings, extra return, bookkeeping that actually has to be clean. For some people the savings are worth it. For me the peace of mind of a simple LLC was worth more.
Talk to a second CPA before you pull the trigger. The first one I talked to wanted to set up payroll immediately. The second one looked at my numbers and told me I'd save maybe $2k a year and it wasn't worth it at my income level. YMMV obviously.
This^ I've seen people elect S corp way too early. The breakeven point is higher than a lot of blog posts admit.