Illinois S Corporations

Illinois S Corporations

What are the tax characteristics of Illinois S corporations?  First of all, single-member LLCs are disregarded entities for purposes of federal taxation unless the LLC makes an S election.  As a result, a single-member LLC’s income and loss are reported on Schedule C of the member’s IRS Form 1040.  Furthermore, all of the income is subject to federal employment taxes.  If your single-member LLC has income of several hundred thousand dollars, this can result in substantial FICA taxes as explained below.

Self-Employment Taxes

Social Security or FICA taxes include two separate taxes.  One is the Social Security tax and the other is Medicare tax.  The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.  The current tax rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.  Only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the social security tax for that year.   For 2013, this base was $113,700.  There is no wage base limit for Medicare tax.  Thus, the 2.9% Medicare tax applies to all wages without limit.

Additional Medicare Tax

Beginning January 1, 2013, an Additional Medicare Tax of 0.9% applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status.  Employers withhold the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year.  The Additional Medicare Tax applies only to the employee, to the employer.

When properly structured, S corporations can be useful in minimizing your social security taxes.   So, consider setting up an S corporation to pass through the S corporation’s income free of employment taxes.  If you are considering setting up an S corporation, contact