I'm wrestling with forming my new venture in Ohio as:
- An LLC
- A S-Corp
- An LLC treated as an S-Corp or tax purposes.
I don't quite understand the tax implications and am hoping one/some of you can set me straight. I'd like to do this by posing a scenario and getting your feedback.
For simplicity's sale (yeah, right), let's assume that I form a 2-person Ohio company whose net profit for the year is $200k.
If I form as an LLC (using default tax treatment), I think that each member (owner) reports $100k on the following April 15. At that time, they EACH pay self-employment tax of 15.3% on the 1st $97,500 (or $14,917.50) and 2.9% on the remaining $2,500 (or $72.50). That works out to $14,990.
What I don't understand is whether they each then ALSO PAY INCOME TAX (in the 28% bracket which is $82,400 - $171,850 for single-filers) on their $100k (or hopefully just the remaining $85,010). I'm thinking that they must...otherwise an LLC is simply a great tool to reduce your income tax rate from 28% to 15%. If they do also pay 28% on the remaining $85,010 ($100k - $14,990), that's another $23,802.80 in income tax. That would bring the total fed tax bill to $38,792.80. (If they had to pay 28% on the whole $100k, that would REALLY hurt, bringing the total tax rate to about 44-45% after state taxes.)
I'm also guessing that each of them must also pay State Unemployment Taxes, etc. on that $100k and then state income tax on the $100k.
So between Fed and State taxes, the LLC scenario tax rate would run around 40%.
Alternatively, if I form as an S-Corp, I could pay each owner-employee a salary of $100k. Under that option, I think the 15.3% and 2.9% still get paid (they are just paid as "employer part" and "employee part". So effectively $14,990 has been taken from the $100k of each employee. All state payroll taxes are also deducted.
I think (?) the difference would be that the most each would end up paying under this option would be 28%+ state items. I'd think that works out to a tax rate 7-10% less than the 40% under the LLC option. Obviously, for saving the 7-10% you must pay the price of many additional filings and recordkeeping.
Am I out of my mind? Is any/some/most/all of what I am thinking correct? I appreciate the help.