Limited Liability Corporation or S CORP

[David Hackney]

Need advice on Business entity. Me and my wife are both W2 employees but we have an option to have my wife be a 1099 Contractor for the school she works for. I am reading and trying to determine some benefits of the S-Corp or LLC to have her work for. My plan is to keep working until I can purchase investment properties which I am working on now, but I would like to get my wife the benefit of passthrough payroll with reasonable wage. CPA I talked to wants to do the S-Corp, but reading, I have discovered that you may be able to tax an LLC as an S-Corp. Does this mean she can still have the benefit of passthrough payroll? Also, the money not paid in payroll, is this charged at the corporate tax of 21 or 25% whichever it is now? Any advice or links for more research would be greatful.

[Bruce D. Kowal]

An important feature of the S Corp is the compensation, the W2 income paid to the Shareholder, and/or his family members.  A common tax avoidance scheme is to avoid the full burden of social security and medicare taxes by choosing a low amount of compensation.  IRS says the comp must be "reasonable".  The soc sec tax applies to the first $147,000 in 2022.  Unfortunately, the Medicare Tax, a combined tax of 2.9% is levied on all levels of compensation.  Talk to your CPA.  It's complicated.

Some fun reading on this topic:  S Corporation Reasonable Compensation