Mark Kohler compares LLCs and S-corps using a $100,000 revenue example. With an S-corp, splitting income 50/50 between W-2 payroll and pass-through draws cuts self-employment tax roughly in half, from $12,000 to $6,000. You'll need to handle quarterly payroll and year-end W-2 reporting.
Chapters
how and how much to pay yourself. So let's say this is your LLC or just a plain old sole proprietorship, and this is your S corporation. So let's say you're making $100,000 here, $100,000 here, you're spending $20,000 in expenses, and you're going to net $80,000. So it's the same bank account, same EIN. Well, over here you're going to pay 15.3% in self-employment tax. That's going to be close to $12,000. Then you're going to pay state tax if you're in one of the 41 states that have state tax, plus federal. That's why the LLC sucks, because it doesn't save you taxes. So over here on the S corp, when you make this $80,000, what we're going to do is split that income into two different pieces, partly as payroll and partly as K-1 or pass-through. I'm going to take 50% in payroll and 50% in K-1. Now, you've already paid yourself, like I said earlier on. You're going to take a draw whenever you want, but on paper, we're going to allocate 50% to payroll. So in this example, it'd be $40,000. We're going to put $40,000 to payroll and then $40,000 to draws on paper. You've already taken the $80,000. I do not care, but we're going to do quarterly payroll S-corp where you're going to send in this Form 941 and you're going to claim $10,000 of payroll. And then at the end, you're going to get a W-2 for $40,000. This $50,000, this is the secret. No FICA, no self-employment tax, no Obamacare. So instead of paying $12,000, you only pay $6,000. You just cut it in half. We just saved $6,000 by converting to an S-corp.
