Understanding LLC vs. S-Corporation for Landscaping Contractors

Learn the tax difference between an LLC and S-Corp for Landscaping contractors.

LLC vs. S-Corporation for Landscaping Contractors

Listen up all you Landscaping Contractors!

An S-corp is usually a great idea, and we make setting up and getting the most out of an S-Corp as easy as possible. We specialize as an accounting firm for landscaping contractors & construction companies and we want to help you reduce your taxes.

We also do your bookkeeping, tax returns and accounting for you - all while guiding you to build tax efficient wealth.

You deserve to keep more of your money and to take advantage of every tax reduction strategy available.  And that is exactly what we can help you do!

Let’s talk about S-Corps for Landscaping Contractors

Why are we focusing on landscaping contractors?

Well, it’s because we absolutely love working with you guys because we can usually make a major impact on your business.

There are some great resources around the internet for advice on this, like TRUIC S-Corp article, the Rich Contractor's Advice on S-Corps, Moneyaisle and more.

I’ll show you what you need to know about the S-Corp, but let me share with you a quick bit about what we do as an accountant for landscaping contractors and construction companies.

First off, we do bookkeeping for you every week and ensure that your financials are rock solid.  Second, we help you implement every strategy possible to reduce your taxes. Third, we help save you tons of time and money by keeping your staff productive. Last, we’ll help you have a perfect tax season while providing a CFO perspective along the way.

We’ll handle all the tax and accounting, so you can focus on what you do best.

LLC vs. S-Corps for Landscaping Contractors

The S-Corporation vs. an LLC is a major way landscaping contractors and other construction businesses can lower taxes.

Landscapers have lots of questions, but they usually have the same goal.

Some questions we hear include:

  • Is it better for landscaping contractors to be taxed as an S-Corporation or an LLC Sole Proprietorship?  
  • What is the tax difference between an LLC and S-Corp?
  • What kind of taxes are saved when you convert from an LLC to an S-Corp?  
  • What are the costs associated with setting up an S-Corp and converting to an S-Corp?

First off, unless you convert to an S-Corp, or if you elected to be an S-Corp from day 1, your initial taxation status will be as a Sole Proprietorship.

You can convert to an S-Corp if you want, if you file a 2553 form.  We’ll help you with this and guide you to not only setup an S-Corp for your landscaping company, but also to get the most out of the S-Corp tax reduction opportunity, while also staying out of trouble.

We want to lower taxes, establish perfect financials, and ensure you’re 100% legit so you don’t have IRS worries.

You want to lower taxes, but you can’t open yourself up to the government's henchman coming into your business and wreaking havoc with an IRS audit.

Converting to an S-Corp as a landscaping company is great, but you can’t make mistakes and you’ll need to do everything possible to abide by the rules that go along with it.

Here’s a little break down of why you might want to convert from an LLC to an S-Corp.

How are you taxed as a Sole Proprietorship LLC

Net profits are what you owe taxes on.

First, you’ll pay medicare and social security taxes, and then the income “passes through” to your personal tax return and you’ll pay income taxes on it.

SOLE PROP TAXES IN ORDER:

  1. Net Profits
  2. Social Security
  3. Medicare
  4. Income Tax

100% of your net profits, up to the social security limit, are subject to both medicare and social security.

Medicare - 2.9% on all income, then .9% more for some high earners
Social Security Tax - 12.4% on all income up to the social security limits

That means that in a Sole Proprietorship, you’ll owe 15.3% in self employment tax right away.

On a $150,000 business, that 15.3% SE tax would amount to $22,950

After the self employment, you’ll pay income taxes, both state and federal.

S-Corp Taxation of a Landscaping Company:

Now, when you become an S-Corp, your income will split into two parts:

  • A Salary
  • A Distribution
The two forms of income for owners of an S-Corp are a salary and a distribution / dividend.

You will file a 2553 form to convert to an S-Corp, and then your corporation will pay you what’s called a reasonable salary.

Download a 2553 form here.

Your salary must be “reasonable” for what you do - more on that later.

You actually should use a payroll system to pay the payroll to yourself in an S-Corp.

The salary paid will be subject to the 15.3% self employment taxes, while the distribution will NOT be subject to the self employment taxes.

Owners Salary = SUBJECT to self employment taxes.
Owners Distribution = NOT subject to self employment taxes.

Therefore, you’d be inclined to take as low of a salary as possible right? Well, sort of.

You’ll need to be wise with the decision making and processing of all your S-Corp systems, particularly the decisions around your salary.

Since the salary is a disadvantage for the owner, many people try to find ways to pay as low of a salary in the S-Corporation as possible, while still honoring the law.

The problem is that the amount of salary should reflect a number of factors and it’s a fairly complex decision - which is why we spend quite a bit of effort and time helping business owners determine the S-Corp salary they should take.

What is a reasonable salary for a Landscaping Contractor that is an S-Corp?

Determining a landscaping contractors S-Corp salary is actually quite difficult. You will want to work with a CPA for landscaping contractors and a tax expert for contractors and construction companies to guide you.

Some factors considered by the courts in determining reasonable compensation:

Read the IRS publication here.

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

The resulting change of becoming an S-Corp?

Well, in the 150,000 in net profit example, here’s a scenario worth looking at.

150,000 net profit
Salary = $75,000
Distribution $75,000
Total SE tax = $11,475

S-Corp SAVINGS IN TAX EACH YEAR:

$11,475!

Now, if you are a landscaping contractor that brought in $150,000k in net profits, you need to work with a professional to determine a wise reasonable salary, but this should illustrate to you that there’s a huge opportunity to save in taxes.

Once you’ve done this, use the tax savings to hire a great accountant that specializes in landscaping contractors, like Passageway Financial, and you’ll be able to focus on your business, avoid IRS audits, get more tax savings and build a scalable and super-powered business.

Another thing you should do with the tax savings of an S-Corp, is to fund investment accounts.

Sure, you’re probably inclined to invest in your business, real estate, and maybe crypto currency, but there’s nothing wrong with opening a SEP IRA, Solo 401k, or even just a taxable brokerage account and investing in index funds (or any appropriate investment) to enjoy compounding interest and tax deferred growth.

Using the markets to drive some investment income is a great idea, and we highly recommend that you consider investing because when you’ve taken a lower salary in your s-corp, you’ll also have a reduced social security benefit in the future.

So, how do landscaping contractors lower their taxes? For starters, it’s a great idea to look at getting an S-Corp setup and using a small business retirement plan to invest.

These two things alone can lower your tax burden by thousands, or tens of thousands each year, and is the start of sound tax planning for landscaping companies.

Is it better for landscapers to be an LLC or an S-Corp then?  Well, every business is different, but we’ve found that for many landscaping contractors and hardscape exterior contractors, becoming an S-Corp has many advantages.  It is usually a good idea to explore what it would entail to become a landscaper that’s an S-Corp and what it would take to get the right compliance, guidance, accounting and bookkeeping systems to support the payroll.

When landscaping contractors decide to become an S-Corp, they’ll usually save in taxes and we make it really easy to convert to an S-Corp and utilize the S-Corp benefits - which means we make this simple.

Do S-Corps pay lower taxes than Sole Proprietorships?  For the most part, the answer is yes.

When is it not a good idea to convert to an S-Corporation?

There are drawbacks to an S-Corp, and you should know that some businesses have other goals, which could mean it’s not wise to become an S-Corp.  There are certainly limitations to who can become an S-Corporation, but for the most part, it’s good for regular income businesses.

When is it a bad idea to become an S-Corp? It’s not wise to become an S-Corp if you’re placing passive income activities, such as rental property, into the company.  It's also not good to use an S-Corp if your goal is to hire all your children or get the absolute most invested into a small business retirement account.

In 401k’s and SEP IRA’s, the amount of employer contributions, which is the contribution the company makes into the retirement account and is really tax efficient, is tied to the salary in an S-Corp.

The company employer contribution to a SEP IRA or Solo 401k, cannot be greater than 25% of the S-Corp salary, or Schedule C net income in a sole proprietorship, not to exceed the threshold limits of around $60,000 a year.

In other words, Sole Props can contribute more, as employer contributions, to the retirement plan. If your goal is to put as much into your retirement plan as possible, then I’d suggest taking that into consideration.

If you have minor children who intend to truly work in your business, you should know that corporations do not enjoy the same employment tax exemptions from the children’s wages that a disregarded entity would (sole prop).

For example, if you have 4 kids, ages 8 to 16, and you want them to work in your business legitimately, S-Corp wages would be subject to the self employment tax. While there is a family business tax cutout for Sole Proprietors, that would mean the wages are NOT subject to SE taxes.

If you’re hoping to hire children and your goal is to sack away as much into retirement plans as possible, you might want to take that into consideration as well.

In short, it’s usually a good idea to check out what converting to an S-Corp would mean for your landscaping contractor business, and then work with Passageway Financial to establish perfect financials, operations, cash controls and tax reduction strategies.