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I have attached an email conversation with the gal, Megan, who is forming our LLC. She recommended that I call several local CPAs for an answer to the question at the end. I did, however, no one can agree on an answer. I thought I'd throw it out here and see what people say. (Background info: we are starting a website and forming an LLC. The following info is in regards to how the LLC will be taxed: partnership or S-Corp.)
(From the gal who is forming the LLC for us)..."The way I see it, if you elected partnership taxation, all of the income that flows through will be subject to self-employment tax as long as it is active, earned income (you are doing something or providing a service to make it happen). That's not to your benefit. S Corporation taxation would work better here, as it would allow you to eliminate the self-employment tax and stream the income into a salary stream (subject to income and payroll taxes) and a passive stream (subject to income tax only). The question becomes: when does the business income classification make the switch from earned to passive income, and how will the IRS treat the switchover."
Any thoughts?
(From the gal who is forming the LLC for us)..."The way I see it, if you elected partnership taxation, all of the income that flows through will be subject to self-employment tax as long as it is active, earned income (you are doing something or providing a service to make it happen). That's not to your benefit. S Corporation taxation would work better here, as it would allow you to eliminate the self-employment tax and stream the income into a salary stream (subject to income and payroll taxes) and a passive stream (subject to income tax only). The question becomes: when does the business income classification make the switch from earned to passive income, and how will the IRS treat the switchover."
Any thoughts?
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