Is setting up an LLC and S-Corp worth it for individuals without an active business yet?

So I just found out that a friend of mine has this interesting tax setup. They've got an LLC & S-Corp established but haven't actually launched their business yet. What they're doing is having their regular job's paycheck directed to their LLC/S-Corp first, and then they pay themselves from that entity. They told me this supposedly cuts down on social security and medicare taxes while also providing some shield for their personal assets from liability. I'm kinda blown away because I had no idea you could do this without having an actual functioning business. Is this a common tax strategy that people use? It seems like a loophole but maybe it's completely legit? Also, what other advantages and disadvantages should someone know about this approach? I'm thinking about starting a side hustle in the future and trying to figure out if something like this would make sense for me, or if it would even be worth setting up now before I have an actual business running. Any insights appreciated!

0 coins

20 comments

Emma Swift

•8M

I'm a tax professional who deals with this question quite frequently. This strategy is called "income shifting" and while it's technically possible, it's extremely risky from a tax perspective. The IRS specifically looks for arrangements where someone forms an LLC/S-Corp and then has their employer pay that entity instead of them directly. This is often considered a form of tax avoidance that may not hold up under audit. The key issue is that if you're performing services as an employee, you should be receiving a W-2 from your employer, not shifting that income through a separate entity. For a legitimate S-Corp arrangement, you need an actual operating business with legitimate business purpose. The tax benefits come from splitting income between reasonable salary (subject to employment taxes) and distributions (not subject to self-employment tax), but there must be genuine business activity.

0 coins

Emma Swift

•8M

The employer's willingness doesn't make it legitimate in the eyes of the IRS. The classification of worker as employee vs. independent contractor isn't up to mutual agreement - it's based on specific factors like behavioral control, financial control, and relationship factors. If someone is performing the same duties they did as an employee but now through an LLC, the IRS may reclassify them back to employee status during an audit. Your cousin's situation could potentially trigger what's called a "worker misclassification" audit, which can result in back taxes, penalties, and interest for both the worker and the company. The IRS specifically targets these arrangements because they represent significant lost tax revenue.

0 coins

Jayden Hill

•8M

I actually tried this approach a couple years ago and can share my experience. I used taxr.ai (https://taxr.ai) to analyze my employment contract and tax situation before making the switch. The software recognized several red flags in my specific employment arrangement that might have triggered IRS scrutiny. Their analysis showed that in my case, I'd need to have multiple income sources and genuine business operations to make this work properly. The tool even provided documentation explaining exactly what the IRS looks for when determining if an S-Corp arrangement is legitimate vs. just a tax avoidance scheme.

0 coins

Jayden Hill

•8M

It was definitely worth it in my case because it saved me from making a potentially expensive mistake. The analysis showed me specific issues with my situation that I hadn't considered, like the fact that having only one client (my employer) would be a major red flag to the IRS. The system combines AI document analysis with review from tax professionals. You upload your documents (employment contracts, business plans, etc.) and the initial AI scan identifies potential issues and opportunities. For more complex situations like mine, a tax professional also reviews everything and provides additional insights. The combination gives you both immediate feedback and expert validation.

0 coins

Lucy Lam

•8M

Just wanted to follow up on my experience with taxr.ai that I asked about earlier. I decided to try it after our conversation here because I was seriously considering the LLC/S-Corp route for my real estate photography side gig. The analysis actually saved me from making a big mistake! Turns out I didn't have enough consistent income yet to justify the S-Corp election costs and filings. They showed me exactly how much I'd need to be earning before the tax savings would outweigh the administrative costs. Instead, they recommended I stick with a single-member LLC for now with pass-through taxation, then convert to S-Corp once I hit about $40K in annual profit. Totally changed my approach and probably saved me a bunch of headaches!

0 coins

Aidan Hudson

•8M

Something nobody has mentioned yet is how frustrating it is to get actual answers from the IRS about these complex business structures. I spent WEEKS trying to get through to someone who could answer my specific questions about QBI deductions for my LLC/S-Corp setup. I finally used Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly what documentation I would need if my LLC/S-Corp arrangement was ever audited, especially regarding reasonable compensation requirements.

0 coins

Aidan Hudson

•8M

It works by essentially doing the waiting for you. When you call their system, it monitors the IRS phone lines and uses automated technology to navigate the phone tree. Once it gets through to an agent, it calls you back and connects you. So instead of you sitting on hold for hours, their system does it. I was skeptical too before trying it. The service costs money, but considering I was able to get critical information about my specific S-Corp situation directly from an IRS agent, it was worth every penny. The agent clarified exactly what constitutes "reasonable compensation" for my industry, which is crucial for S-Corp owners trying to balance salary vs. distributions.

0 coins

Connor Richards

•8M

I have to eat my words from earlier. After my last comment, I was still desperate to get answers about my LLC situation so I tried Claimyr despite my skepticism. I'm honestly shocked - it actually worked! Got a call back in about 35 minutes, and suddenly I was talking to an actual IRS representative. I asked specifically about the arrangement where someone directs their employment income through an LLC/S-Corp (like OP's friend). The agent confirmed this is a major audit trigger and explained the "economic substance doctrine" they use to evaluate these arrangements. Saved me from making a $5k mistake on my taxes this year. If you're dealing with complex business structure questions like this, being able to get direct answers from the source is worth it.

0 coins

Grace Durand

•8M

I've had an S-Corp for my consulting business for 3 years now. Here's my practical advice on the whole LLC/S-Corp thing: 1) Don't bother setting it up until you actually have business income. The annual costs add up - I pay about $800/yr for state filing fees, $1200 for an accountant to handle my corporate return, plus additional costs for payroll services. 2) The savings only really kick in once you're making decent profit (>$40k in my experience). 3) Many employers won't agree to pay your LLC instead of you because it creates potential liability issues for them. 4) Consider a SIMPLE IRA or Solo 401k as part of your strategy - these can actually provide better tax benefits than just the S-Corp alone.

0 coins

Grace Durand

•8M

For a small Etsy business with $10k expected revenue, I wouldn't recommend the S-Corp election initially. A single-member LLC with pass-through taxation would make more sense to start. This gives you the liability protection without the additional compliance requirements and costs of an S-Corp. At $10k revenue (which might only translate to $3-5k profit), the self-employment tax savings from an S-Corp structure wouldn't offset the costs of maintaining it. You'd need to file separate corporate tax returns, set up payroll, pay yourself a reasonable salary, etc. For most small businesses, that complexity doesn't make financial sense until you're consistently clearing $40-50k in profit.

0 coins

Lydia Santiago

•2M

For graphic design specifically, I'd recommend checking the Bureau of Labor Statistics Occupational Employment and Wages data for "Graphic Designers" in your geographic area. The IRS often references BLS data during audits as it's considered authoritative government data. I also used Glassdoor and PayScale to document salary ranges, but made sure to filter by experience level and location. The key is showing you did your homework - I created a simple spreadsheet with 5-10 comparable positions and their salary ranges, then documented why I chose a specific amount within that range based on my experience and responsibilities. One thing that helped during my audit was showing that my total compensation (salary + distributions) wasn't unreasonably low compared to what an independent contractor in my field would charge for the same work. The IRS wants to see that you're not just minimizing salary to avoid employment taxes, but that there's genuine business reasoning behind your compensation structure.

0 coins