Dear Kate:
We cannot comment on the CPA in question without knowing him . . . however, it is probably safe to say that if any CPA tells you that the tax implications of an S corp and an LLC are exactly the same, then run--don't walk--to the nearest telephone book and find another CPA. And it might not hurt to contact the board that regulates the public accounting profession in your state to verify a CPA's license.
Aside from limited liability protection, what S corps and LLCs have in common is "flow-through" or "pass-through" taxation, which is to say that neither entity is taxed separately. Rather, the net taxable income from these entities flows through to the owners of the company and are taxed at the owners' individual income tax rates. But this is where the commonality ends.
Owners of LLCs, like sole proprietors, are considered to be self-employed and, as such, must pay a self-employment tax on net earnings from self-employment of $400 or more (this is in addition to individual income tax). The self-employment tax rate is currently 15.3% which consists of 2.9% for Medicare and 12.4% for social security*.
By contrast, in an S corp the owner-officers who perform services on behalf of the company are treated as employees. Only the salaries paid to employees are subject to employment tax. Any remaining profit that is withdrawn as shareholder distributions, while subject to income tax, is not subject to employment tax. See "S Corp vs. LLC: Which Structure is Right for Your Business?" for some examples.
But this is only the tip of the iceberg; there are other tax implications associated with each entity that should be explored before making a decision. For example, an S corp (or any other business) with employees would also be responsible for federal and/or state unemployment taxes. And certain transfers or conversions of property with an S corp may result in a taxable event (whereas the assets of an LLC can be transferred between the LLC and its owner in most cases without a tax consequence).
Still, one advantage that an S corp has over an LLC is its ability to set up a tax-deductible medical reimbursement plan for its employees including owner-officers. This deduction is currently not available for self-employed owners of LLCs. For more information on medical reimbursement plans, see http://www.tradersaccounting.com/mrp.asp.
As you can see, there are differences between an S corp and an LLC that should not be ignored. As an incorporation service company we do not provide tax advice. But a qualified CPA should be able to help you identify the pros and cons associated with each entity and advise you of tax-saving strategies for your particular situation. A knowledgeable CPA who can help you save on taxes is worth his weight in gold.
Chandra & Chrissie
Incorporation Specialists
*In 2006, only the first $94,200 of total net income is subject to the social security portion of the tax. All of the the total net income is subject to the Medicare portion of the tax.
