For years, I have recommended that all businesss should be operated as limited liability companies – that is no more! Recent tax changes have now made LLCs much less attractive. Instead, we now suggest that our business clients should consider forming “S-corporations,” except in rare instances. See below for the details and for a way you can avoid these taxes if you act quickly.
Why Have Things Changed?
Effective January 1, 2013, certain types of income have become subject to an additional 3.8% or 0.9% in employment taxes. Many LLCs can avoid these taxes by making an election to be taxed as an S corporation.
Effective this year, all income earned from LLCs not taxed as S corporations that are engaged in an active business is subject to self-employment taxes imposed at a rate of 12.4% (up to the social security maximum — $113,700 for 2013) and a 2.9% rate for Medicare (without any maximum). Also beginning this year, there is an additional 0.9% tax for Medicare (bringing the total to 3.8%) for individuals earning in excess of $200,000 ($250,000 for couples filing married filing jointly). There is also a new 3.8% Medicare tax (with no maximum) on income not derived in an active business including interest, dividends, annuities, royalties and rents, and income from a passive activity of a trade or business.
Help! I Want To Avoid These Taxes!
Don’t panic! There is help for those who now operate as an LLC. It is called a conversion. You can convert your LLC into an S-corporation, and the fees are relatively little. However, there is a very small amount of time left to make the conversion this year. Those conversions must be complete by March 15. That means that time is running out, so contact us today if you want to avoid these taxes.