C Corp vs LLC Taxes


6

I'm trying to figure out the various taxes taken out for a C Corp vs LLC. Single-member/ shareholder. (C Corp has more deductions.)

C Corp: (1) Tax on profit (after deductions), (2) Payroll tax withheld from employee paychecks, (3) Tax on dividends when distributed (considered personal income)

vs

LLC: (1) Federal income tax, (2) Self-employment tax.

Are there any other taxes taken out? (I'll then weigh my options of which can save the most money)

LLC Incorporation Tax Corporate Structure

asked Feb 22 '11 at 08:53
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Dave
46 points
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1 Answer


5

Here's an overview of the different taxes for each entity type:

C Corporations
There will be 1) Corporate Income Tax (with a top rate of 38%) 2) Dividend Tax when taken out personally (15% currently), 3) Payroll tax on officers (which are required) which is roughly 7.2% to the corporation and 7.2% to the officer, but only on the salary. The officer is then taxed on this income at their personal income tax rate again, with a top rate of 35%. Many people try to "zero out" the C Corporation profit by paying out all of the profits in salary, effectively eliminating the dividend tax of 15%.
Then there are state corporate taxes and personal taxes on top of this, depending on which state you reside in. Some states have no personal income tax such as Florida and Texas. Other states have an additional layer of tax, such as New York City, which has a 3rd tax which is an 8% (approximate) city tax on the C Corporation.

LLCs
LLCs do not have a corporate level tax at the federal IRS level, so all profits flow through to the individuals at the individual tax rate (top rate 35%). In additional all of this is also subject to self-employment tax (approx 15%) which is the payroll tax x2 in the C Corporation context. Therefore, the LLC pays more self-employment tax since in the C Corporation context it is only levied on the officer's salary. The LLC is not required to have officers, and so most do not pay payroll taxes.
LLCs at the state level are either exempt or have a smaller tax than the C Corporation, such as a 1-2% tax compared to a 6-8% tax. Like the C Corporation, personal income tax must be paid at the state level as well.

Unless you "zero out" your income by paying out all of the income of the C Corporation in the form of a salary and eliminating the dividend tax of 15%, a C Corporation usually has a higher tax burden, depending on which state you reside in, of course, as a final factor.

Note: This is not legal advice and does not create an attorney client relationship.

answered Feb 22 '11 at 09:48
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Alex Naegele Lawyer
653 points
  • Great answer! The other factor is that C Corporations have more deductions available which could lower the taxable income considerably... – Dave 14 years ago

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LLC Incorporation Tax Corporate Structure