business type

[Account Closed]

Alternative to the LLC with scorp election

I see 3 downsides to running with the LLC with scorp election.

1 Separate tax return for each LLC and yourself.

2 Unemployment tax on your income- although limited to $8,500

3 Ambiguity on what a reasonable salary is for a house flipper.

For number 3, allow me to expand on my confusion. I expect to make 250k this year flipping houses. If I look up a construction foreman in my area the salary is around $45k. I find this to be too low for a salary and the IRS will probably agree. If I look beyond the construction tasks and attempt to add in other work related items I get lost. Very hard to find comparable salaries.

I was suggest to use an alternative approach involving 2 LLCs.

LLC 1 would buy/sell houses.

LLC2 would run payroll, have employees and charge LLC 1 an hourly rate for worked performed. Lets say for $50/hour per man.

LLC1would pay ordinary income on its profit.

LLC2 would pay ordinary income and self employment tax on its profit.

Benefits to the second approach.

1. A clear way to calculate/determine what your self employment tax base is.

2. A single tax return.

3. No unemployment tax paid on my active income.

4. Easier to have multiple LLCs for asset protection, based on benefit 2 above.

5. In general I would expect less self employment taxes paid out.

Thoughts/issues/things missed

Thanks.