File My LLC As A C Corp Or Sole Proprietor?

I am a single member LLC, no employees. I filled out my tax forms using the 1040 and sched C and sched SE, and discover that I must pay a hefty amount in taxes.

I am thinking that I should file as a C corporation to see if that would be beneficial to me. What line on my 1040 should I report the income from the corporation – or what sched should I use to report the income from the corporation?

In general, what corporate and personal forms and schedules should I use if I choose the C Corporation route?

– Barbara, D.C.

Answer

You’re going to have to convert your LLC to a c-corporation or elect to have your LLC taxed as a corporation. Changing your tax election after operating the business can result in large tax penalties. You’ll need an accountant on this one.

And you’re probably not going to save as much as you think.

As a c-corporation, your LLC will pay corporate income tax on the LLC’s income, which is currently at a rate of 35%. The LLC’s income would no longer be reported on your 1040, instead, it would file its own tax return and pay the 35% corporate tax rate. By comparison, your personal rate might be lower than 35%.

Second, if you want to pay yourself from your c-corporation, you’ll have to go through the whole withholding payroll exercise in addition to paying taxes on your salary (reported on your 1040 just like salary from any other employer would be reported). In terms of employment taxes, the LLC pays half your FICA and Medicare taxes, with the other half withheld from your paycheck.  If you’re looking to avoid paying self-employment taxes, converting to a c-corporation will not help you.  All you would be doing is chopping self-employment taxes into 2 pieces–one paid by your LLC and the other paid by you.

Finally, if your corporation has money left over after paying corporate taxes, and paying you a salary, it can then issue you a dividend.

And you’ll pay taxes (on your personal return) on that dividend. That’s the “double tax” for corporations.

But I would first consult with an accountant to see if you’d really save much by converting to a c-corporation before you spend time and money on conversions.

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