LLCs and drawing Social Security.

Factual Questions
1

I will tell you up front that I’ve posed these questions to my accountant, but as might be expected, she’s crazy busy this time of year, so I may not hear back as fast as I’d like. I promise I’m not seeking legal advice or anything like that but I need to do some planning and this is a first step.

My husband has an LLC (engineering and prototype manufacturing.) He has not drawn a salary, but the business has made enough to pay 2 part time employees, buy machinery and supplies, pay for software and training - stuff like that.

I don’t entirely understand the difference between husband as an individual and husband as an LLC WRT taxes, etc, but I assume since he hasn’t paid himself, we don’t owe SS or Medicare to the Feds.

I know that when you’re under your minimum retirement age you lose $1 of SS for every $2 you earn over a threshhold amount. Which leads to my question - since he isn’t paid, can he collect his SS without that penalty? Is it dependent on whether the LLC is profitable or not? Dare I hope there’s a plain English resource that could explain it to me?

I don’t expect to hear back from our accountant before the month is out, and this isn’t urgent, but I’m looking at retiring at the end of the year, and it’s probably a good idea to sort out the money before I take my crayons and leave.

2

I could be wrong, but I thought SS and Medicare would just be part of the tax he pays at the end of the year (and/or estimates throughout the year). I believe any money drawn from the ‘flows through’ the LLC return and onto your personal return.
In fact, I just pulled up the owners personal tax return for this business. Form 2210, Line 2 asks for “Other taxes, including self-employment tax and, if applicable, Additional Medicare Tax and/or Net Investment Income Tax”

The IRS defines Self-Employment Tax as “The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)”

So that would cover SS and Medicare.

I don’t have time at the moment, but I can look later and tell you how/where the ‘flows through’ happens.

3

I just looked at our return for this year and there’s nothing withheld for SS or Medicare - maybe because the LLC had a loss last year?

4

Business or personal return?
I’ll have to take a closer look at the ones for the business I’m working at (I might even be able to access them from home), but, again IIRC, the LLC doesn’t pay taxes. Money flows through the LLC and then you pay (kinda) regular income tax.

The LLC can lose money all day, but if the owner is taking a draw, that would still be income that’ll get taxed.

Also, if you used a CPA to do your taxes, often they have some tricks up their sleeve to wiggle out of some of those things.

5

Did the LLC actually make money? If your husband broke even after paying salaries and expenses, there’s no taxable income.

6

Note that if he really didn’t pay any SS/Medicare tax for these years, that also means that he got no years income counting toward Social Security/Medicare. This means that his eventual monthly Social Security check will likely be smaller. And since, for most people, Social Security is a good investment, he’s losing out on that investment.

Has the LLC made other kinds of investments into some kind of a pension plan for him? Or is he just skipping any kind of investment toward his retirement for these years? Bad idea, I’d say.

7

The LLC is 2 years old and has yet to show a profit. Between expenses and depreciation, it’s pretty much treading water. There’s a lot of potential, but it’ll take time.

And he’s had more than enough years working for others to build up his SS plus other retirement funds. This is mostly a post-retirement business/hobby. As long as it’s paying for itself, it’s a win in our book.

8

Regardless of the LLC making a profit, is he drawing money from it himself. That is, do he/you see realize income from it?

9

assuming he is under 66 years of age.

10

Dang - my earlier post didn’t, and I just noticed. Anyway, he’s 62 and so far, he hasn’t drawn any money from the business for anything other than business expenses and material purchases. Maybe this year, he can draw some out… maybe… But we’re just finishing a new building in our yard for the shop, so I see another year of negative income.

11

My business is an LLC. I don’t give myself a paycheck; the profits from the business are my income. It all goes on Schedule C, and the self-employment tax is what goes to SS. No profit would mean no SE tax, and therefore no SS contribution for the year.

12

Back to your actual question. My understanding is that income reported on Sched C will indeed reduce your SS benefit if you’re under your full retirement age.

13

Hmmm… the LLC is building on (i.e. enhancing the value of) property owned by you and your husband personally (I presume). What are the legal and financial/tax implications of that? Is it imputed income?

I assume (since I’m Canadian, not familiar with laws down there) basically your husband owns 100% of a company that has not paid him any profits or salary or cash withdrawals (or any “in kind” assets) but he does have 100% of the share in a company which is increasing in value based on its assets. Does the IRS get persnickety and demand that he account for that value? Or is it like buying stocks and holding them and selling them, the taxes come home to roost when he in some way cashes in on those assets (i.e. sells or liquidates the company when he gets tired of his hobby)?

14

Thanks - I had a feeling that would be the case. We’ll probably hold off having him apply for SS if it looks like the company will do well.

15

**md2000 **- I have absolutely no idea how the new building affects us - that’s why we pay an accountant. And we’ll certainly address that with her once we’re past the craziness that is pre-April 15. (I’m pretty sure that’s why she hasn’t gotten back to me.)

I figure at a minimum, it’ll raise our property taxes, which means our mortgage payment will go up. But it’s only money, right? :eek:

16

What I was getting at was - it’s your(joint) property. Instead of giving you money, let’s say, the LLC builds a $20,000 building on your property; nice heated/AC garage/utility building with electricity, plumbing, toilets, etc.

So has the LLC essentially given you a building? (I.e. given you $20,000)? If it were a construction site office trailer sort of thing, the argument would be the LLC owns it and could pull it out at any time so you gain nothing. But a fixed building is improvement to a property owned by the LLC’s owner. It’s not terribly portable.

And of course, the IRS is always looking for ways people bend the rules to get the business to write off personal use enhancements - i.e. is that 85-inch flat screen TV really for presentations to clients, or is the fact it was bought a week before the superbowl a coincidence? Do you really need a BMW to go visit clients…

The whole idea is that the LLC and the owner are separate entities, and any money or consideration flowing from LLC to owner has to be considered income. (well, technically owner draw - and be declared). For example, if the building went on the neighbour’s property, you’d have a lease or permission to use for free or similar agreement which also declares how the building is disposed of when the LLC no longer needs it, how the owner can evict, etc. The building is carried on the books as an asset, and when disposed of by the LLC, presumably that asset value is considered the amount transferred to the land owner.

Since the land owner also owns the LLC the arrangement would not be quite so formal. I suppose the saving grace is that really the land owner does not benefit from the building until the LLC gives it up and stops occupying it (so can argue the benefit does not come home to roost until the LLC moves away).

Of course, IANAAccountant so this is all based on a few courses on business and accounting I took 30 years ago and what I absorbed doing IT for accountants. Your Mileage May Vary, but yes I’ve raised a few questions, you accountant should have an interesting answer.

17

So, yes. He can start getting early SocSec and since he has no income it wont cost him. However, he is thus betting for the next 4-5 years he wont make significant income.

18

But he has a net loss.