I’m an accounting and bookkeeping nerd. It’s no wonder I talk about LLCs vs. S-Corps so much. I find them so fascinating!!
But I also recognize that what’s interesting for me may not be interesting to you too — especially if you’re a creative entrepreneur. You’d rather spend your time actually doing the things, whether that’s creating a website or scheming up your latest course/offer.
I hate to rain on your parade, but knowing whether or not an LLC or an S-Corp is right for your business is still important stuff to think about.
And yeah, I get it — this topic may be a doozy, but I’m here to simplify it for you! You’ll be back to being the creative genius you are in no time (after you figure out which one is right for you, of course).
Take a look at the video below or scroll to catch the notes!
LLCs tend to be the most common business model for online businesses — creative or not. These can be much easier to run depending on where you are in your business, and it’s what most people elect to do once they’ve moved on from being a sole proprietor (outsourcing and hiring contractors to help with client work).
Paying yourself when your business is an LLC is pretty simple. You’re taking what’s called an “owner’s draw” to pay you, the business owner.
All this means is that you’re transferring money out of your business account and into your personal one. There are no rules for when or how often you have to do this, but like anything, I always recommend keeping track of each payment.
With LLCs, payments made to YOU won’t count as expenses on your profit & loss (P&L) statements. These are all technically personal expenses or a reduction in equity.
This is when you’d want to apply for an employee identification number (EIN), also known as a business identification number, instead of just using your social security number to file taxes.
As an LLC, you also want to make sure you’re staying up to date on paying your quarterly estimated taxes. This cuts down on that big scary number you see when filing taxes in April! You split it up into 4 payments instead of one lump sum.
Now, filing quarterly can be pretty time-consuming, and there are a lot of factors that will play into how much you owe. This is where hiring a CPA can help in addition to having a bookkeeper.
While a bookkeeper will make sure everything’s added up and on track, a CPA will help you assess the bigger picture and look at any other expenses you may need to consider when filing your taxes.
A CPA will also be looking at your situation more holistically – so not just your business, but also if you’ve purchased a house, sold some investments, had a kid, etc.! Those will all affect your tax return and also how much you’re paying in quarterly estimated tax payments throughout the year.
Businesses don’t usually, if ever, start out as an S-Corp. Instead, they file as an S-Corp after being an LLC for a while, when they’ve had a major uptick in expenses and revenue.
How do you know if you should take the next step and file for an S-Corp? Keep in mind that I am not a Certified Public Accountant, therefore you should not take this as absolute truth.
The general consensus is that once you can consistently pay yourself a salary that would be reasonable for a W2 employee you’d have, you could benefit from becoming an S-Corp.
What you DON’T want to do is make the switch before you’re ready. If you’re not making enough, or don’t have payments set up to where you can pay yourself a consistent salary (whether that’s weekly, twice a month, etc.), then hold off for a bit.
If you retract that and want to go back to being an LLC, then you can’t file to be an S-Corp again for another five years. Yikes!
If you want to get down into the nitty gritty of things to know whether or not becoming an S-Corp is a smart move, I’d recommended talking to a CPA. They can help you determine the compensation for your role based on guidelines set by the IRS, and can also help you run calculations to see if the benefit actually outweighs sticking with your LLC.
If your business is an S-Corp, you pay yourself a salary because you, even as the business owner, become an employee of your business. And your salary gets categorized as an expense on your P&L statements.
That’s about all there is to it when it comes to assessing an LLC vs. an S-Corp in terms of how you get paid as a business owner!
When you’re an S-Corp, taxes get taken out like they do for W-2 employees (because you are now an employee of the business). You have your gross wages, and then payroll will take out your taxes throughout the year.
Those taxes are then withheld and go into a liability account until it’s paid to the IRS when you file your taxes.
This is where having an accounting/bookkeeping software like Gusto comes in handy. In Gusto, you can clearly see employee taxes and employer taxes under “Payroll History” for each specific payroll run. Easy peasy!
I hate that I even have to mention this, but be cautious of CPAs or firms advertising how much they can help you save by switching from an LLC to an S-Corp.
I’ve seen so many scammy-targeted ads on Instagram from CPAs or firms saying “We can save you thousands of dollars in taxes by helping you switch to an S-Corp!”
And the reason this is so yucky is that not everyone is ready, or is even qualified, to make that switch.
It’s totally okay to continue taking owner’s draws from your business and operate as an LLC, save for taxes properly, and make quarterly estimated tax payments.
You do YOU, and look for a CPA that will support you in that.
A CPA can totally help you file your taxes, whether you’re an LLC or an S-Corp. And if you’re trying to decide which one is right for you, they can help you settle that too.
But before you hit up a CPA, make sure you’ve got those books in order! It’ll help the process of filing go by much faster and it will help them get a better idea of how they can help you. (They will THANK you for it!)
Not sure how to get started with all of that? Be sure to check out my “Bookkeeping For…” series over on YouTube, where I show you all the bookkeeping basics depending on your creative field (i.e. copywriters, web designers, etc.)!