Sub-S vs LLC: Self-Employment Tax Issues

This post from About.com addresses one of many issues involved in deciding between an S-Corp and an LLC as an organizational structure for an owner-operated small business:

"With an S-corp, you have to pay people - at least on paper - a fair market salary for the job they're doing. If the money's not there, you generally defer the salary. With an LLC, though, the owners are essentially self-employed.

So, if you make more money than fair market salary, in an LLC, you'll be paying extra employment taxes, because all of your income will come as "self-employment" income, whereas in the S-corp, anything over fair market salary is a profit distribution, not "wages", and only subject to your normal income tax, not employment taxes.

But paying more in employment taxes isn't necessarily a bad thing. Tracking and filing quarterly payroll taxes is a lot of recordkeeping, and it costs you time, and perhaps money, to do. On the other hand, with an LLC, you'll have to make your personal quarterly estimates, but you only have to actually calculate and file your self-employment tax with your personal tax return.

So purely based on taxation considerations, if you're expecting to make about fair market salary or less, you're probably better off with the LLC. If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corp makes more sense."