So my LLC started as just me doing freelance work on the side, and I left it as a disregarded entity. Now I've got two part-time employees and revenue is finally steady enough that I'm wondering if I should elect S-corp status. The self-employment tax is starting to sting. But every time I try to read up on it I get buried in payroll rules and reasonable salary arguments. Any of you been through this? Worth the extra admin or a giant headache?
Taxes
My LLC is growing and I'm reconsidering how it's taxed
S-corp saved me about 9k in the first year, but I pay my accountant more and I had to set up payroll. If you can't commit to running payroll correctly every single month, don't bother.
How much net profit are we talking? If it's under like 50-60k the savings often get eaten by payroll service fees and extra filing costs.
Reasonable salary is the part everyone fights about. The IRS doesnt give you a magic number. If you take almost nothing as salary and the rest as distribution, congrats, you've just invited an audit.
Not an accountant, but I did the math For my own situation last year. For me the break-even was around 70k net. Below that it wasn't worth the hassle.
That tracks. I was around 95k when I switched.
Wait, two part-time employees changes things right? If they're on payroll already you've at least got the infrastructure. That's half the reason I never did it, didn't want to run my own payroll just for me.
Everyone always says 'talk to a CPA' like that's free advice. It's the correct answer but it's also 300 dollars for the meeting lol
300 is cheap if it prevents a five figure mistake. Not saying it's nothing, but spend it once and get a real answer instead of forum guessing.
Also worth checking if your state has its own LLC fees or franchise tax that change the math. Mine did and nobody mentions that part.
The other thing nobody warned me about is the payroll tax deposits. Miss a deadline and the penalties are brutal. If you're the kind of person who forgets to file stuff, S-corp will punish you.
I'm the kind of person who forgets to file stuff. Noted.
Honestly get a bookkeeper for the monthly stuff and just review it. That's what I ended up doing. Costs me 200 a month but I sleep at night.
Everyone's throwing around 'reasonable salary' like there's a standard. There kind of is, it's whatever the market pays someone to do your job. If you're a freelance designer, look up what a designer salary is in your area and start there.
This thread is making me realize my situation is way simpler than I thought and I should stop overthinking it.
Famous last words before tax season.