Deciding Between LLC and S Corp: Picking the Ideal Business Structure for Design Professionals
Venturing into the Freelance Design World: LLC vs S Corp - A Simplified Guide
Hey there freelancing designers! Today, we're diving into the world of business structures, specifically LLCs and S Corps, to help you make an informed decision about the future of your design career.
Let's Get to Basics
A Limited Liability Company (LLC) is a legal structure protecting your personal assets from potential business liabilities. On the other hand, an S Corporation (S Corp) is a tax election for your already-established legal structure, like an LLC. S Corps offer tax advantages but require careful consideration of additional costs and responsibilities.
LLCS and S Corps - More Than Meets the Eye
While some consider LLCs and S Corps separate choices, they often work together. In short, an LLC taxed as an S Corp (LLC S Corp) offers advantages over the default LLC taxation. That's why we usually simplify it as LLC vs S Corp.
Tax Implications: An LLC S Corp vs LLC Default
Both LLCs and S Corps feature pass-through tax structures, meaning that business profits flow directly to your personal tax return and are taxed at the individual level. However, the S Corp structure brings some unique benefits.
- How an LLC is taxed: By default, an LLC is taxed as a sole proprietorship or partnership and is subject to self-employment tax (15.3%) as well as income tax based on your tax bracket.
- How an LLC S Corp is taxed: When your LLC becomes an S Corp, it no longer pays self-employment taxes on the business profits. Instead, the owner pays income tax on their profits via a salary and through pass-through income. Here's a breakdown:
- You become an employee of your business and receive a paycheck paid via payroll.
- You pay income tax on your profits and social security/medicare taxes on your paycheck (15.3%).
- The advantage lies in the fact that fewer profits are subject to social security and medicare taxes, potentially leading to tax savings overall.
Making Sense of the Numbers
Let's consider an example to further illustrate the impact of taxation:
| Structure | Profit | Self-employment tax | Income tax | Total taxes ||---------------------------|--------|--------------------------|------------------|------------------------------|| LLC Default (example) | $60,000| $9,480 | $10,400 | $19,880 || LLC S Corp (example) | $60,000| $4,320 (on salary) | $10,400 | $14,720 || | | ($31,680 - salary) | | $11,934 in potential savings |
Please note that these tax calculations are for illustrative purposes only. Your actual tax liability will depend on your specific circumstances. If you're interested in a personalized comparison, check out Collective's tax savings estimator.
S Corporation: Beyond the Tax Advantages
As attractive as the tax savings might be, operating an S Corp comes with additional expenses:
- Payroll Service Fees: Depending on your payroll service provider, you'll need to factor in the costs of managing payroll complexity.
- Bookkeeping Costs: S Corp taxation requires more detailed bookkeeping, which may lead to increased software costs or outsourcing to a bookkeeper.
- Tax Preparation Fees: S Corps are required to file two tax returns, incurring additional filing fees.
Which Structure Suits You Best?
While S Corps can provide tax savings, the costs associated with the additional complexities may not be worthwhile for lower earning designs. At Collective, we often find that freelancers earning less than $60,000 in annual self-employment profit may benefit from maintaining an LLC and postponing S Corp taxation until reaching the $60,000 profit threshold.
On the other hand, if you're generating more than $60,000 in annual self-employment profit and are seeking to optimize your tax strategy, it may be time to consider S Corp taxation for your LLC.
Collective Makes S Corps Simple
At Collective, we cater to solopreneurs, making it easy to set up and maintain your S Corp through our all-in-one platform. With formation, bookkeeping, payroll, business tax returns, and compliance support all in one place, you'll have the tools, technology, and team you need to power your business under a single login.
Learn more about our services and sign up with Collective today. Stay tuned for more Community stories on our blog Courtside and share your thoughts or suggestions with us at stories@our website.
[1] "S Corporation" - IRS.gov[2] "S Corporation Election (Form 2553)" - IRS.gov[3] "Understanding LLC Tax Classifications" - legalzoom.com[4] "S Corporation vs LLC: A Guide for Freelancers" - collective.com
- In personal-finance matters, freelancers might benefit from understanding the tax advantages of an S Corporation (S Corp) for their Limited Liability Company (LLC).
- With an LLC S Corp, freelancers can potentially save on self-employment taxes by paying income tax on profits through a salary and pass-through income, while their business no longer pays self-employment taxes on the business profits.
