LLC questions

[Daniel Patton]

So I am currently set up as a sole member LLC (officially as of today) but have not yet filed the 8832 or 2553.

My question is, does anyone have their LLC set up so that the only member is actually their living trust? If so, do you pay yourself as a w-2 employee to avoid self employment taxes?

[Blake Meester]

@Chris Soignier

Your description of SE tax is on the right track conceptually, but the math will end up being slightly different. Take the following for example:

Employee earns $100,000 W2. This would be subject to the 6.2% Social Security Tax and the 1.45% Medicare tax. The payroll taxes would amount to $7,650 (6,200+1,450). This is 7.65% of the W2 amount.

Using your example, we would expect the SE tax to be double ($15,300) or 15.3% of the $100,000. You will see that this is not the case. The actual SE tax amount will be less than 15.3%.

The SE tax calculation would be $100,000 multiplied by .9325 = $92,350. This is the amount the SE Tax of 15.3% is applied to which results on $14,130 of tax. (92,350 * .153). This is an effective rate of 14.3%.

To summarize the example the W2 employer would pay $7,650 in payroll taxes and the W2 employee would pay $7,650 in payroll taxes. If you controlled both sides (LLC and Individual), the effective rate would be 15.3%. If the entire amount was subject to SE tax, you would pay 14.3%. These amounts are not the same.

Added bonus: On top of the SE Tax calculation, there is usually an above the line adjustment available which consists of the deductible half of the SE tax amount (7,065 in this case) which would further lower the effective rate of the income tax you actually end up paying. This effects the income tax calculation, not the SE tax and is designed even the playing field for SE individuals.

Food for thought.

@Daniel Patton

There are many considerations when considering a choice of entity and you should definitely have a discussion with an attorney and a tax professional that are experts in real estate. It is very difficult, if not impossible, to apply “general” advice to your specific situation. SE Tax is not the only issue at hand.