LLC 15% pass through vs Sole Proprietorship 20% passthrough

Feb 24, 2019

  1. MedSupMan
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    MedSupMan New Member

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    Curious if you folks have an opinion on this. I was just looking into creating an LLC S-corp and saw that there is a 15% passthrough deduction and then I read creating a Sole Proprietorship can claim a 20% deduction.

    If Sole Proprietorships allow the extra 5% tax deduction, why are the LLC and S-corps so popular?

    The only extra benefit for LLC's seem to be liability. I've heard that the E&O insurance we buy isn't worth much in terms of protection, so maybe the LLC liability protection would be worth giving up the additional 5%. But if someone makes 200k per year or builds a renewal business of substantial size that 5% extra can be real money.

    BTW, I was looking at Legal Zoom and Incfile.com

    I know I need to talk to an accountant but one thing I read is that accountants are like any profession, there are good ones and mediocre ones -- good advice and not-so-good advice.

    Any opinions are appreciated.
     
  2. somarco
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    somarco GA Medicare Expert

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    Any form of separate entity can be pierced if you don't operate at arms length
     
    somarco, Feb 24, 2019
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  3. MedSupMan
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    MedSupMan New Member

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    Thanks Somarco. I was doing the LLC or Sole Proprietorship for the 15% or 20% tax pass through mainly.
     
  4. somarco
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    somarco GA Medicare Expert

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    Hence the reason for my earlier response . . .
     
    somarco, Feb 24, 2019
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  5. sshafran
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    sshafran Guru

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    The primary benefit (imho) of the s-corp is that you set a reasonable salary (subject to regular payroll withholdings) and a distribution.

    That distribution holds the tax savings.
     
    sshafran, Feb 24, 2019
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  6. MedSupMan
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    MedSupMan New Member

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    Thanks Somarco and Sshafran. Good points to consider.
     
  7. axeman462
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    axeman462 Guru

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    My understanding is that an LLC pass through also gets the 20% deduction...
     
  8. MedSupMan
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    MedSupMan New Member

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    Thanks Axeman. I think you are right.
     
  9. bluediamond
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    bluediamond Guru

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    It would be interesting to know how many of you independent agents have set up an LLC with S corp election vs doing nothing.

    If you're independent (without legally setting up a sole proprietorship) my understanding is you will also get to use the 20% pass through. Am I wrong?

    Strange I should see this thread today when I'm mulling over with the advice of a CPA to set up the LLC and file as S corp. I have until March 15th to back date to Jan 1. I see the advantages but being a very skeptical person also this recommendation puts hundreds more in my CPA's pocket each year. If I still get a pass through as independent and pay a little more self employment taxes quarterly then the more self employment I pay will raise my social security next year and if I go with his suggestion and take a small salary then distributions I won't have to pay the self employment tax on would be defeating the purpose of a raise in social security in a year or two and end up being out more money in the end.

    What do you all think?
     
  10. sshafran
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    sshafran Guru

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    I have not set up an LLC with S-Corp - all I have is S-Corp. I'm really not sure what the benefit of the LLC would be...

    I can tell you this - a reasonable salary for an insurance agent is not astronomical - many agents don't earn a lot. My first year as an s-corp my "salary" was around $30k. It's gone up a "reasonable" amount each year.

    But if you aren't new - let's say you pay yourself $60k-80k salary as you have experience. That's the W2 wage. But, you're profitable, the S-Corp makes some cash, you have some expenses, some future marketing to pay for in business savings, and then leftover - which you distribute to yourself by writing yourself a distribution check. No taxes taken out.

    I've heard some people distribute more than their salary. I don't do that, I may be too conservative, but it is what it is.

    I agree on that the CPA earns more when we do this - mine runs my payroll monthly for myself and my wife (ahem, administrative assistant) and they do everything for the local taxes for us so we don't have to do a thing.

    I just think that the distribution - and payroll savings - is where the real value is. I've heard that the s-corp is not a good idea compared to sole-prop when the revenue is under 100k. Over 100k, it is a good idea. But that's just a rule of thumb someone gave me a few years ago.

    --

    As far as payroll and social security benefits - it's not something I've factored in. I'm 34 and I'm not really banking on SS - I want the most $ now - your situation and age may make it more of a factor? I don't really know.
     
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