S Corp

CPA here, you would want to form a new Holding Company LLC that owns the two separate LLCs to keep liability separate and now the two LLCs flow into the S Corp. The new S Corp then runs payroll (based on reasonable comp for each business) pays salary to each owner and the rest of the net income flows to you on K-1s. I specialize in tax strategy for clients but advise always needs to be run through your CPA because everyone can be different. Happy to jump on a consult call too.

I am also weighing converting an LLC to S Corp, and the comment about SS tax and Medicare tax got me thinking...

Question: If I switch from an LLC to an S-Corp and take part of my income as distributions to save on self-employment taxes, does Social Security count those distributions when calculating future benefits, or only my W-2 salary?

GPT Answer: Social Security only counts wages that are subject to FICA (your W-2 salary). S-Corp distributions are not subject to Social Security tax and do not count toward your earnings record or future benefits. Lowering salary may save payroll tax now, but it also reduces credited earnings for Social Security later (unless you’re already above the annual SS wage base).

Big picture: This is really a capital allocation decision across time, not just a tax optimization. Choosing between cash flow today (payroll tax savings) vs. guaranteed, inflation-adjusted lifetime income later (Social Security credits). So I'm considering my age and remaining working years, expected longevity, other retirement assets, whether I’ll exceed the SS wage base anyway, and risk tolerance vs. guaranteed income. I'm realizing my S Corp goal wouldn't be just minimizing payroll tax at all costs, but setting a reasonable salary that balances IRS compliance, long-term Social Security accumulation, and tax efficiency.

Electing an S-corp for tax efficiencies really depends on what your "reasonable compensation" (IRS's requirements) would be in your company. You also have to consider that you'll be losing some QBI deduction when you take a salary. Plus you now have to run payroll (added admin cost), plus the cost of the new 1120-S business tax return.

I'm not anti-S-corps at all (my business is an S-corp). I would just ask your CPA for a full analysis and decide if there a "return on hassle" (stole that from Sean Mullaney) given the current tax laws.

I have found substantial financial benefits in converting my LLC to an S Corp. You can set your salary (W2) at a relatively low amount (needs to be justifiable in your market) and then take the rest of your compensation as distributions which are taxed at a lower rate. Significant upside.

I'm not sure what risk/s you're considering, but it definitely makes sense to reduce overhead expenses and inefficiencies. 1 insurance bundle (a form of risk management) would be cheaper, etc, too. It's a probability and statistics problem... the Risk(sum) = Consequences(sum) x (Vulnerabilities-Mitigations)(sum) x Threats(sum). Run for businesses together, then solo, go with the lower risk. A lawsuit is probably your highest risk... again, thar insurance can be priced individually and combined. Per-unit, bundled will be cheaper. Talk to an attorney.

Have not heard about combining 2 unrelated LLCs into one. Maybe it makes some things easier for tax and legal filings but seems short sighted for legal protection.

Also for S corp elections, the only real savings are self employment taxes on the amount you declare as distributions as opposed to the salary you pay yourself. If you're paying yourself more than the social security wage base, the only savings is then the Medicare tax. The tax filing may also be more expensive as you need to file a corporate return.