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Quick, plain‑English guidance from our team to help you move faster—whether you’re filing as an individual or running a business. Need more help? Call us at 405.736.1099 or send documents securely through our client portal.

What is the tax benefit to being an S Corp vs a Single Member LLC?

A single member LLC that has not elected a tax classification is treated as a sole proprietorship. As such, the taxpayer who owns the LLC pays income tax and self-employment tax on the profit of the company. Self-employment tax is paid at the rate of 15.3%.

Had the company been taxed as an S Corp, the taxpayer would still pay income tax on the profit but social security and Medicare tax would be limited to any salary the taxpayer is paid. So, for example, if a business had a $150,00 profit and the owner was paid a salary of $100,000, the taxpayer would save approximately $7,650 in social security and Medicare tax. ($50,000 x 5.3%.)

An S-Corp owner who works more than a minimal amount is required to pay himself or herself a reasonable salary. IRS defines a reasonable salary as what an employee who id not an owner would be paid for performing similar services. If an owner is paid in distributions rather than salaries, IRS may reclassify part of all of the distributions to salary and assess taxes, penalties and interest.

IRS expressly prohibits partners in a partnership from being treated as employees. Instead, partners who are paid to work in the business would normally be shown as receiving guaranteed payments. The guaranteed payments would be shown on the partner’s individual tax return where income tax and social security tax would be due.

An employee would normally be subject to the will and control of the employer, working when and where they are told. The employer has the right to hire and fire the employee. Adding to the presumption that they are employees would be using tools and/or equipment belonging to the employer of perhaps a vehicle belonging to the employer.

 

An independent contractor essentially owns his or her own business. The contractor would be far less subject to an employer’s time demands. They would likely work for multiple companies, be covered by their own insurance, have a business bank account and be registered with the state of local government as a business. It is vital that a 1099 be issued to an independent contractor. Misclassifying employees as contractors could allow federal and state tax agencies to impose very large tax, penalty and interest assessments.

REPORTING REQUIREMENTS

The IRS and many states require that business owners file 1099 forms for every individual or non-corporate LLC paid the reporting amount for their respective type of income.

In addition, unlike payments to most other corporations, payments for legal services must always be reported on a Form 1099, regardless of how the law firm is legally structured (e.g., corporation, LLC, partnership).

  • Form 1099-NEC is used to report attorneys’ fees paid to your business’s attorney (nonemployee compensation).
  • Form 1099-MISC, Box 10 (“Gross proceeds paid to an attorney”), is used to report payments to an opposing counsel, typically as part of a legal settlement.

Failure to file for 2025 could result in penalties from the IRS that could be as much as $1,000 for EACH omitted, late or incorrect 1099. Individual states may also generate penalties. The 1099 forms must be provided to the taxpayer and the IRS by February 2, 2026. . No filing extension is available. 

 

AVAILABLE SERVICES

We do NOT prepare 1099-K (Payment Card and Third Party Network Transactions) Forms. 1099-K forms report payments for online or electronic transactions, such as through apps like Venmo or PayPal, and credit cards.

 

Type of 1099 Forms we DO prepare and their respective reporting amounts:

  • 1099-DIV (Dividends and Distributions): Reports income of $10 or more from stocks, mutual funds, and other investments.
  • 1099-INT (Interest Income): Reports interest income of $10 or more from banks, brokerage firms, and other financial institutions.
  • 1099-MISC (Miscellaneous Information): Reports various payments of $600 or more, including rent, prizes, and awards. It is also used for royalty payments of $10 or more.
  • 1099-NEC (Nonemployee Compensation): Reports payments of $600 or more to independent contractors, freelancers, or other self-employed individuals.

CPA’s, or Certified Public Accountants, are the products of years of education and must pass one of the most difficult professional exams before being licensed. CPA’s are subject to the oversight of a state licensure board. They must meet the requirements to earn a permit to practice annually in Oklahoma. Among those requirements are rules that mandate the completion of continuing education, a minimum of 120 hours every three years. CPA’s are well-educated, well-trained and subject to state oversight.

 

By way of comparison, “accountants” or “bookkeepers” require no education, no test to obtain a professional designation, no licensing and no continuing education requirement. There is no oversight board. Anyone can call himself or herself a “bookkeeper” or “accountant”. While many individuals may be very good at what they do, using a CPA is certainly a better bet.

  1. Be responsive when they report concerns to you.
  2. Document corrective actions
  3. Use performance improvement plans.
  4. Retain video and audio evidence of events.
  5. Maintain a policy manual.
  6.  Conduct training for both supervisors and employees, especially regarding harassment.
  7. Hold all employees to the same performance standards. Treat employees the same.
  8. Follow state and federal laws regarding pay etc.
  9. Know whether your company must comply with EEOC and FMLA.
  10. Understand your responsibilities as an employer

There are some exceptions, but generally yes.

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“Reasonable compensation” for an S corp owner is defined by the IRS as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. There is no single formula; it’s a fact-based assessment to prevent owners from misclassifying salary as distributions to avoid payroll taxes.  There are many factors that go into determining reasonable compensation.  Here’s the link to IRS’s current guidelines https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#reasonable We recommend that if you are involved in the S Corp business, and you are taking draws, you most likely should be on payroll.

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