tax benefits of llc

[sman]

Wouldn't it still be a savings on the FICA regardless of how much more you ended up making?

Well, the income limit on Social Security for 2018, is $128,400. Meaning once you get to that amount, you are no longer paying Social Security taxes on income above $128,400. Using that figure, if you had an LLC treated as an S Corp for tax purposes, if you paid yourself 50% of that amount ($64,200) as a salary and the other 50% as a distribution, you'd only be paying FICA taxes on the salary portion and not the distribution. So instead of paying FICA on $128,400, you'd pay it on $64,200. Thus saving $9,822.60 in FICA taxes (15.3% of $64,200). The reason is you don't pay FICA on distributions.

The point I was making in excess of $250,000, if you split that in half ($125k in salary and $125k in distributions) you are virtually maxing out FICA taxes and thus no real tax advantage by having an LLC treated as an S Corp.

 

[Fisher]

I will disagree with some here on the potential tax benefits of an LLC. You can elect to have your LLC treated as an S Corp for tax purposes. This allows you to pay yourself a salary and to take distributions. The distributions aren't subject to FICA taxes. So if your salary for 2018 is less than $128.400, then the difference you take in distributions aren't subject to the 15.3% in FICA taxes. For example, lets say you have $150,000 in commissions, if you pay yourself a salary of $75,000 and distributions of $75,000, that means you wouldn't be paying FICA taxes on $53,400 (the difference between the $75,000 salary and the $128,400 income limit subject to FICA taxes).

The FICA taxes on $53,400 is $8,170.20 (this is a combined amount of the employee and employer match). Of course there are expenses to having an LLC, but it's likely not going to be over $8,000 (based on this scenario).

This^^^

 

[BIG one]

Sman is correct, you would only save 2.9% after that. So if you made 200k, it would look something like this. Take 110k as salary paying full FICA, then taking the other 90k as a distribution. 18,400 avoids FICA of 15.3% save s $2815,and the last 72,800 avoids the 2.9% Medicare employment tax rate which has no income limits. For a total savings of $4900 and some change. As far as just having an LLC, the reason is not for the company liability side necessarily it's for the personal liability side. Say your daughter runs a red light and BOOM. There is no reason to form an LLC until you have a biz or you make enough for the savings above. In most cases it will complicate things.

 

[FutureForbes]

Sman is correct, you would only save 2.9% after that. So if you made 200k, it would look something like this. Take 110k as salary paying full FICA, then taking the other 90k as a distribution. 18,400 avoids FICA of 15.3% save s $2815,and the last 72,800 avoids the 2.9% Medicare employment tax rate which has no income limits. For a total savings of $4900 and some change. As far as just having an LLC, the reason is not for the company liability side necessarily it's for the personal liability side. Say your daughter runs a red light and BOOM. There is no reason to form an LLC until you have a biz or you make enough for the savings above. In most cases it will complicate things.

Yeah It sounds like unless you really do alot of biz and have a massive downline then you are only going to make things hard on yourself come tax time. I just though of it because I had met and MGA, who atleast at the time had 50 agents in his downline, or claimed to, so he formed an LLC called "his name" Insurance group. But, he is contracted as an MGA under an IMO.

 

[sman]

Yeah It sounds like unless you really do alot of biz and have a massive downline then you are only going to make things hard on yourself come tax time. I just though of it because I had met and MGA, who atleast at the time had 50 agents in his downline, or claimed to, so he formed an LLC called "his name" Insurance group. But, he is contracted as an MGA under an IMO.

You definitely don't have to have a downline for it to be beneficial.

"A lot of biz" is a relative term. I'd say once you get to the $100k mark (maybe even less) it's probably worthwhile. The tax savings on that, assuming a 50/50 split on salary vs distributions, would mean a tax savings of $7,650.

Only you can determine at what point you think it's worth doing.

 

[somarco]

your E/O Insurance will protect you more then an LLC will

Most E&O policies have more loopholes than Swiss cheese. If carriers did not require it I would not have it. Almost like having an accident policy that only pays when jumping off the Sears tower.

 

[FutureForbes]

Most E&O policies have more loopholes than Swiss cheese. If carriers did not require it I would not have it. Almost like having an accident policy that only pays when jumping off the Sears tower.

What would the E/O actually protect you against? It's not like being a Real Estate Agent where a mistake can prevent a family from getting there dream house and raise there family and prevent a kid from going to a school.

Also, spoke to an attorney, he told me that llc's really only protect up to so much, if the other side has a really good attorney they can crack through the llc and go after you personal assets.

 

[Quotebroker]

The point I was making in excess of $250,000, if you split that in half ($125k in salary and $125k in distributions) you are virtually maxing out FICA taxes and thus no real tax advantage by having an LLC treated as an S Corp.

You aren't required to split your salary and distributions in half though. Your salary simply must be "reasonable" which is extremely nebulously defined. In the 250k example there's nothing to stop you from only taking 50k in payroll. Heck, the median agent makes 36,374 according to PayScale.com.

Of course, the more aggressive you are with the lower payroll the higher your audit risk, as the IRS will reclassify distributions as payroll when they deem necessary. But there's a ton of wiggle room between 125k and 36k for you to play with, depending on your location, experience, etc.

 

[sman]

You aren't required to split your salary and distributions in half though. Your salary simply must be "reasonable" which is extremely nebulously defined. In the 250k example there's nothing to stop you from only taking 50k in payroll. Heck, the median agent makes 36,374 according to PayScale.com.

Of course, the more aggressive you are with the lower payroll the higher your audit risk, as the IRS will reclassify distributions as payroll when they deem necessary. But there's a ton of wiggle room between 125k and 36k for you to play with, depending on your location, experience, etc.

Right. I just used those numbers as an example. Although I do split mine along those lines in hopes of avoiding that special letter from the service.