tax on LLC doing flips vs. tax on S-CORP doing flips?

[Jeff D.]

Could someone please tell me in as general numbers and terms as possible what the overall difference in end taxes might be between these two? Let's say for example the company clears 120k in profit on sold flips each year. I know there's tax savings going the S-corp route, but how much generally?

[J Scott]

Self employment tax is currently 13.3% (10.4% Social Security and 2.9% Medicare) on the first $106,800 of income and 2.9% (Medicare) on everything above that. In addition, the employer part of that amount (half the total) is deductible from income.

So, on $120K of taxable income, here are the two scenarios:

1. LLC with no Corp Election:

All $120K is subject to SE taxes, which amount to about $14,321 (according to an online tax calculator I used).

2. LLC with S-Corp Election (or S-Corp):

A "reasonable" salary will be subject to SE taxes, while the rest of the income will be disbursed as a dividend. My accountant uses the general rule of 40% of net income is a reasonable salary, which would in this case be about $48K.

SE taxes on $48K amount to about $5,895 (again, according to an online tax calculator I used).

So, if my calculations are correct, in your example, you'll be saving about $8,426 in SE taxes by running the income through an S-Corp or an LLC taxes as an S-Corp.

Assumptions made:

- You define "reasonable" the way my accountant does;
- The online tax calculators were correct;
- You didn't have any other wages, income or deductions which would impact the numbers;
- 2011 SE tax numbers (may change).