Can anyone explain LLC vs S Corp to me… so confused?

General
1

Met with my CPA, and they said turning my LLC into an S Corp would save me on taxes. But now I’m just confused.

Here’s what I know (or think I know):

For an LLC:

  • Gross income
  • Minus expenses and deductions
  • Minus standard deduction
  • Equals taxable income

For an S Corp:

  • Company makes $100k profit
  • I pay myself a salary of $50k (reasonable salary)
  • The remaining $50k stays in the business, and I don’t pay Social Security or Medicare taxes on it
  • I only pay taxes on the $50k salary I took

Here’s where I’m stuck: How do deductions and expenses work with an S Corp? Do they get taken out by the business or on my personal side? And if it’s on the business side, does it even matter? Wouldn’t my personal taxes stay the same no matter what the business deductions are?

Am I getting this all wrong? Please help me understand.

Edit

Here’s the real numbers we’re dealing with:

  1. Farm business (LLC) - it always loses money
  2. My construction business (LLC) - income is usually offset by farm losses
  3. My wife’s real estate business (LLC) - has $89,000 taxable income after deductions

We file jointly and have two kids as dependents.

Here’s my math:
$89,000 - standard deduction ($29,200) = $59,800
Earned income credit on $59,800?
Taxable income at 22% = $13,156
Tax bill before credits = $13,156
Earned income tax credit = $6,960
Child tax credit = $4,000
Final federal taxes owed = $2,196

Is my math right? CPA keeps pushing us to combine my construction and my wife’s real estate business into one LLC and make it an S Corp. Is this bad advice?

2

Here’s how it works:

For an LLC with $200k income and $100k expenses:

  • You report $100k net income on your personal taxes.
  • Self-employment (SE) taxes are calculated on that $100k.
  • You deduct half the SE taxes and take the QBI deduction.
  • You pay income taxes on the remaining amount.

For an S Corp with the same $200k income and $100k expenses:

  • You pay yourself a $50k salary. The S Corp pays half the FICA taxes.
  • After expenses and FICA, there’s $46k left in profit.
  • On your personal taxes, you report $50k salary and $46k as K-1 profits.
  • The QBI deduction applies only to the $46k.
  • You save money because SE taxes are only on the salary, not the full $100k profit.

The S Corp saves on Social Security and Medicare taxes but might reduce your QBI deduction, so it’s a trade-off.

3

You’re close, but here’s where you’re off:

For an LLC:

  • All profit goes into one bucket.
  • You pay income tax and SE tax on that profit.
  • Example: $100k profit, you pay 15.3% SE tax ($15,300) plus income tax.

For an S Corp:

  • Income is split into wages and profit.
  • Example: $50k salary and $50k profit.
  • You pay 15.3% on the $50k salary ($7,650). The $50k profit is not subject to SE tax but is still taxed as regular income.
  • The savings: You don’t pay SE tax on the profit, so in this case, you save $7,650.

The S Corp setup can save you money, but you have to manage payroll and stay compliant.

4

@Oren
I updated the post with real numbers. Do you think it’s worth switching to an S Corp?

5

Dru said:
@Oren
I updated the post with real numbers. Do you think it’s worth switching to an S Corp?

Be careful with S Corps. If you don’t follow the rules, you could default into a C Corp, which has its own complications. Some people prefer the simplicity of staying as an LLC.

6

Dru said:
@Oren
I updated the post with real numbers. Do you think it’s worth switching to an S Corp?

Your wife’s real estate income might make sense to convert to an S Corp, but I’d keep the construction business separate. Combining them could expose both businesses if something goes wrong in one.

As for your real estate income:

  • If you switch to an S Corp, she could take $50k as salary and $35k as profit.
  • This could save around $2k-$3k in SE taxes.

However, check your state’s rules for real estate commissions. Some states require them to go directly to the agent, not a business. If allowed, it could be worth exploring.

7

Honestly, I wouldn’t bother switching to an S Corp right now. Your income isn’t high enough to make it worthwhile, especially since you’d have to pay two salaries (yours and your wife’s).

8

Here are the real numbers for our situation:

  1. Farm (LLC) - loses money
  2. Construction (LLC) - offsets farm losses
  3. Real estate (LLC) - $89k taxable income after deductions

We file jointly with two kids.

My math:

  • $89k - $29.2k standard deduction = $59.8k taxable income
  • 22% tax bracket = $13,156
  • Earned income credit = $6,960
  • Child tax credit = $4,000
  • Final federal tax owed = $2,196

Does this look right? Our CPA is suggesting combining the construction and real estate businesses into one LLC and making it an S Corp. Is this good advice?

9

@Dru
Your math is a bit off. Tax brackets don’t work that way. Also, you didn’t include Social Security and Medicare taxes.

Here’s a rough idea:

  • $89k income
  • SE taxes: $12,500
  • Federal income tax: $2,000
  • Child tax credit: $4,000
  • Total federal taxes: About $10,500

You’re not eligible for the full earned income credit because your AGI is too high.

10

@Remy
Why wouldn’t I qualify for the earned income credit? Is AGI income minus expenses before the standard deduction?

Also, would switching to an S Corp save us money?

11

Dru said:
@Remy
Why wouldn’t I qualify for the earned income credit? Is AGI income minus expenses before the standard deduction?

Also, would switching to an S Corp save us money?

Yes, AGI is before the standard deduction. Even if your AGI was $59k, the earned income credit would be very small, not the full amount. The full credit is for much lower incomes.

Switching to an S Corp for just your wife’s real estate business might save you around $2k-$3k in SE taxes. But combining the construction and real estate businesses into one S Corp doesn’t seem like a good idea. Each business should remain separate to protect against liabilities.

12

@Dru
The farm might be treated as a hobby by the IRS if it’s not profitable, which means you can’t deduct its expenses.

13

Rory said:
@Dru
The farm might be treated as a hobby by the IRS if it’s not profitable, which means you can’t deduct its expenses.

It does make some money—just a few thousand a year from selling cattle. Does that change anything?

14

@Dru
If it’s making money, then it’s fine. You should be able to deduct expenses as long as it’s a legitimate business.