Discussion:Form a PLLC, select Subchapter S Election taxation to avoid SE tax?
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Discussion Forum Index --> Tax Questions --> Form a PLLC, select Subchapter S Election taxation to avoid SE tax?
| 19 January 2007 | |
| A client of mine is an Arizona real estate agent. He has information via this website "www.mypllc.com" and asked me if this true. It says that he can form a PLLC then file IRS form 2553 selecting Subchapter S Election taxation. Come tax time he would file an 1120S tax return passing through his profits onto his 1040 schedule E thus avoiding having to pay SE taxes on any of his income. This assumes he would not be paying himself as a W2 employee.
I realize just because a website says something that does not necessarily make it true. Does this situation seem plausible or are there any potential gotcha's. This also gets me to wondering if this is indeed true would this same principle work for all other simple LLC businesses allowing then to also avoid SE taxation. Thanks for any input. | |
| 19 January 2007 | |
| The IRS can apply 15.3% FICA tax to distributions which are disguised compensation. In the case of one-person service corporation, that can be 100% of distributions, and such an approach has been upheld in the Tax Court. | |
| 19 January 2007 | |
| They are close enough to sucker quite a few people I imagine. They are correct no SE tax would be assessed if you file the 2553. However, in their FAQ they ask you to consult your CPA on the question of a salary draw from your PLLC taxed as an s-corp. The answer to that consultation will be that yes it is required, and FICA is the same rate as SE tax, plus you get the other basket of payroll assessments.
Will | |
| 19 January 2007 | |
| As an aside, I can't believe CPA's are allowed to present this offer in this way... | |
| 19 January 2007 | |
| Even though an LLC (or PLLC) elects to be taxed as a corporation and elects S status, the owner/employee must still abide by the "reasonable" compensation requirements. | |
| 19 January 2007 | |
| You can also tell him to pay his share of taxes if he is making good money! | |
| 19 January 2007 | |
| The fact that S corporation officers (and entities electing to be taxed as S corporations)must take a reasonable salary is very well established in law. There are numerous long threads on this board debating what constitutes reasonable, I would suggest you look at some of those for more details. | |
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