LLC vs S Corp: Tax Advantages for High-Income Household Starting Side Business

The LLC vs S-Corp question is one I get all the time from high earners starting side businesses. For your situation, here are some thoughts: With your household already in a high tax bracket, the main benefit of an S-Corp (saving on self-employment taxes) still applies, but you need to weigh it against the administrative costs. An S-Corp requires you to run payroll, file separate tax returns, and maintain more formalities. For a side business with a $130K investment, the question is really about projected profit. If you expect to clear more than about $40K in profit annually, the S-Corp election might make sense because you can pay yourself a reasonable salary and take the rest as distributions (avoiding SE tax on the distribution portion). As for ownership, having both spouses on the paperwork doesn't necessarily create tax advantages in your situation. In fact, it might be cleaner to have just one owner if only one of you is actively involved. However, if you're in a community property state, the income may be split for tax purposes regardless.

After struggling with a similar decision last year for my side consulting business, I found an amazing tool that helped me make the decision - https://taxr.ai really laid out the numbers clearly for my specific situation. I uploaded my previous year's tax returns and some basic projections for my new business, and it showed me the actual tax differences between LLC and S-Corp structures over a 5-year period. The tool showed me that even though I was also in a high tax bracket from my day job (around $300K household), the S-Corp still saved me about $8K in self-employment taxes in year one alone, which more than covered the extra administrative costs. It also helped me determine the optimal salary to set for compliance while maximizing tax savings.

Just wanted to follow up after trying taxr.ai that was mentioned above. I was initially concerned about the cost-benefit given my CPA fees, but the analysis was enlightening! For my situation ($280K W2 income plus a growing side business), it showed the S-Corp would save me about $7,500 annually after all administrative costs. What really helped was seeing the year-by-year breakdown as my business grows. In year 1, the savings barely outweighed the costs, but by year 3, it became a no-brainer. I also discovered I'd been overpaying myself in salary from my existing S-Corp based on their "reasonable compensation" guidelines - making that adjustment alone will save me around $3K this year. Definitely worth checking out if you're on the fence about business structures or trying to optimize an existing setup.

I was in almost exactly your position last year - W2 income of $400K between my spouse and me, and starting a side business with about $100K investment. I went with an S-Corp and quickly discovered how impossible it was to get through to the IRS when I had questions about some of the employment tax filings. After spending days trying to reach someone at the IRS (constantly getting disconnected after waiting on hold for hours), I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically wait on hold with the IRS for you and call you once they get an agent on the line. Saved me literally hours of frustration. Given the complexity of S-Corp requirements compared to a simple LLC, having a reliable way to get IRS clarification quickly has been invaluable. Just something to consider as you weigh the options.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to resolve an issue with my S-Corp's EIN application that was holding up everything. I expected to wait days even with their service, but they got me connected with an IRS business tax specialist in about 1.5 hours (I was doing other work during that time instead of sitting on hold). The agent was able to fix my application issue on the spot, saving me weeks of delays for my new business. For anyone dealing with S-Corp setup or compliance questions, having a way to actually reach the IRS when inevitable questions come up is seriously valuable. The tax savings of an S-Corp mean nothing if you can't get set up properly or resolve issues that arise.

One thing nobody's mentioned yet is the qualified business income deduction (Section 199A). For 2024/2025, this can be a significant factor in the LLC vs S-Corp decision for high-income individuals. With your household W2 income around $450K, you're already above the phase-out threshold for most service businesses (which starts around $364K for married filing jointly). But if your side business is NOT in a specified service trade or business (like consulting, health, law, etc.), you might still qualify partially for the QBI deduction. The way S-Corps can limit your salary could actually reduce your potential QBI deduction. With an LLC (taxed as a sole proprietorship), all profit is eligible for potential QBI consideration.

Has anyone used an umbrella LLC with a separate tax election for the entity? My CPA suggested forming an LLC but then electing to have it taxed as an S-Corporation (Form 8832 followed by Form 2553). He said it gives the liability protection and flexibility of an LLC with the tax benefits of an S-Corp.

This is a great discussion thread! I'm in a very similar situation - household income around $380K and considering a side business. One angle I haven't seen mentioned much is the state-level implications. I'm in Texas (no state income tax), but for those in high-tax states like California or New York, the state treatment of S-Corps vs LLCs can significantly impact the overall analysis. Some states don't recognize S-Corp elections and will tax the entity at the corporate level regardless. Also, regarding the ownership question - even if your spouse isn't actively involved, there could be estate planning benefits to joint ownership, especially if the business becomes successful. If something happens to you, having your spouse as a co-owner can simplify business continuity compared to having to transfer a sole proprietorship through probate. Has anyone factored in the potential exit strategy implications? If you plan to eventually sell the business or bring in outside investors, the corporate structure (even if taxed as S-Corp) might be more attractive to buyers than an LLC structure.