Discussion:Tax planning to reduce self-employment tax
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Discussion Forum Index --> Basic Tax Questions --> Tax planning to reduce self-employment tax
Discussion Forum Index --> Tax Questions --> Tax planning to reduce self-employment tax
| 13 June 2008 | |
| Have MMLLC that used to have 4 owners but now only 2 -- a husband and wife. LLC net profits are $70,000 per year, and so Mr and Mrs are getting slammed with self-employment tax.
Two questions: Would changing tax classification (via 8262 check the box) to an S Corp and paying them wages of $35,000 be a good strategy here? And are there any hazardous tax traps I need to be aware of if we make the switch? | |
| 13 June 2008 | |
| They are not getting slammed. They will need every dime of benefits in retirement, and it's not going to go broke. I know it's not easy to get clients to understand that.... sigh. One thing for sure, if your clients have/had had parents with good genes, SS is a screaming bargain. | |
| 13 June 2008 | |
| OK, maybe it's me that doesn't understand (double sigh)... couldn't they save 7.5% on half of their profits? | |
| 13 June 2008 | |
| The S Corp wil pay the other 7.65%. Isn't that their other pocket? | |
| 13 June 2008 | |
| Anchor: can't you set the same reasonable compensation as Guaranteed Payments for services (under the MMLLC) that you'd have to pay in the S. Corp. salary anyway (reasonable comp.)? Pay the SE tax on that amt. | |
| 13 June 2008 | |
| Hire more accountants! That way you can lower their year end profits and give more people jobs. Great charity thing for the economy =) | |
| 13 June 2008 | |
| I know you are not supposed to discuss audit rates with clients in deciding whether to take a tax position. However, we are not doing that here. They are already a MMLLC. Now, as a practical matter, you have a much lower chance of having the reasonableness of monies subjected to SE tax questioned on a 1065 than you are on a 1120S. That's just a freedom of speech fact from statistics disseminated by the Service itself. But still, the concept is the same, the GP's for services must be reasonable compensation. | |
Southparkcpa (talk|edits) said: | 13 June 2008 |
| The regulations, which are temp regulations, surrounding SE tax on LLC members have not been touched since 1997 and there are no plans to address them anytime soon that I am aware. That said, research in this area is plentiful using google etc. If you can document that one member is passive, then their share of income will be passive and not subject to SE tax. This of course has downfalls as JD states. Also, I do not believe you can limit the SE tax to only guaranteed payment unless you have 2 different classes of owner ship. i.e ONE K1 can't have guaranteed payments and other income and only the GP subject to SE tax (I am pretty sure about this). The BIG law firms here set these LLC's up with a 1 percent GP (Member) and the same person has a second interest which is passive. You can accomplish this with 2 k1's BUT be able to defend it on audit. | |
Death&Taxes (talk|edits) said: | 13 June 2008 |
| Anchor: there is this wonderful magic box to the left of the discussion. If you type the word "Bifurcate" you may find this: Discussion: LLC, SE Tax, and Bifurcation of Income. It comes complete with references to learned articles from a NY CPA journal and quotes from Beanna Whitlock. All is revealed there.
Slammed is semantics: that same self-employment income permits them to 'sock' almost 29K into one person 401Ks. | |
| 13 June 2008 | |
| And, in the case where there really are no regs, just withdrawn ones?, it's just as logical to subject -0- of the 70K to SE tax, as to subject all of it. But, I don't have that much guts, even though it was listed an an option by a very prestigious law firm in an article I read. I am offering myself as a token passive member of any operation (to show how it's done), and I will promise to fulfill my duties in spades. Find me at the golfcourse. Err, well the interest itself is prolly taxable. | |
| 13 June 2008 | |
| Hmm, come to think about it, it may be taxable, but not to me, I'm providing no services. | |
| June 13, 2008 | |
| Since you don't do anything, no salary would be provided, Crow. | |
| 13 June 2008 | |
| D&T: Great article and discussion referenced above. More cogitation on bifurcation than I ever expected :) Thanks to all | |
| 13 June 2008 | |
| Is my reputation that bad? Don't answer. No salary, but what I was saying was no tax on my free interest in the firm, as it would not be in exchange for services.
Right, if wife was truly passive, it would be along what Southpark said. Which is referred to as bifurcation I guess. What this is is setting up a Limited Partnership type structure inside the LLC, which is rather ironic as the LLC was to replace the LP. But, it must be working. | |
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