[akcreek]

LLCs that elect S-Corp tax status (in the US) issue distributions and it can be at any interval you like. We do it monthly. The distributions are not subject to FICA(Social Security or Medicare) taxes, which is where the savings exists over W2 income. Outside of those taxes distributions are just earned income and treated as such by local, state and federal governments.

It gets tricky when your profits get high and the effort of setting up and maintaining an S-Corp becomes more questionable. The 12.4% Social Security stops at $132,900 (2019) in income so if you want to max out a solo 401K (assuming a 25% employer contribution) you'll need to have $148,000 in W2 income ($19K from the employee and $37K from the employer to hit the 2019 limit of $56,000).

So at that point you've already paid all of the Social Security tax possible for the year and the S-Corp advantage is greatly minimized as you only continue to save on the 2.9% medicare tax. That's still something though as there is no cap on that tax.

S-Corp is significantly more work than a standard LLC. You'll have a separate corporate tax return and use the K1 for your personal taxes. You'll have to run payroll as you as an owner will now be a W2 employee and deal with workers comp, unemployment and all sorts of other fees and taxes depending on your state (for example here in WA they just started a paid family medical leave tax on gross wages up to $132,900). Some you'll be exempt from as an owner/employee and others you won't.

There is a lot more to the subject for sure, but those are a couple of highlights to dampen the mood of the idea of huge tax savings...

[mbesto]

> S-Corp is significantly more work than a standard LLC.

Honestly - it's not. I pay Quickbooks ~$50/month where I click one button every month and it pays me my "salary" and then pays social security. I then pay my accountant to do all of the tax prep (which I would do S-Corp or not).

[akcreek]

I suppose it depends on the setup of the business so I shouldn't make a blanket statement that S-Corps are more work for everyone. For me specifically, after 13 years with standard LLCs, it's definitely more work. The bulk of it being the initial setup, but there is still quite a few additional monthly tasks.

- The change to a W-2 employee for my partner and I meant setting up a proper accountable plan for expense reimbursement. So submitting expenses to the company, recording proof of purchase, etc. and that being processed as non-taxable income via payroll.

- We had to switch from our individual SEP IRAs and setup a Solo 401K. Not a huge deal to set up, but definitely more work as contributions on the employee and employer side are both done manually every month for each of us.

- Instead of a single check per month now there is compensation via payroll and I have to separately calculate and process the distributions for each of us afterward.

- HSA and medial insurance reimbursement is a total pain. We use Gusto and we have to have them make a manual adjustment to the W-2s at the end of the year in order for them to accurately reflect this reimbursement as it can't run through the accountable plan and their system cannot properly process this type of reimbursement. I actually had to have them issue my W-2 3x this year because they did it wrong the first two times. This is another perk of the S-Corp that I forgot to mention earlier though as healthcare reimbursements are counted as W-2 income, but are not subject to FICA taxes. So that increases the income eligible for contribution to the 401K without FICA being paid on it. $7,000 is the 2019 limit for HSA (for a family) and the health insurance is whatever it is in addition to that.

- The setup was definitely a major hassle for me. We had to register with various city and state agencies even though we are exempt from many of those taxes as owner/employees. It took us around six weeks in total to set all of this up.

- One last addition. In order to divert more pre-tax dollars into investments I hired my wife to help part time to work enough to max out her employee contribution to her 401K and then the company adds 25% to that since all employees must have the same employer contribution through a solo 401K. That's not specific to an S-Corp, but it is a good way to save another chunk of pre-tax money for those that are married and in a position to do so.

[mbesto]

> The change to a W-2 employee for my partner and I

Well ya there ya go. If you're a sole proprietor then it makes a lot of sense. Start bringing other people on and it gets way more complicated.

[gk1]

Same, with Gusto. Don’t even have to click anything as Gusto has an auto-payroll option.