Are you really 15 times more likely to be audited if you’re operating as an LLC? In this video, Matt explains why the audit threat might not be as scary as it sounds, and how switching to an S-Corp could benefit your tax situation. Don’t fall for scare tactics—Matt gives you the facts you need to make an informed decision about your business structure!
There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!
Video Transcript:
Business Advice Video:
You are 15 times more likely to be audited if you are just operating as an LLC. Now, that may shock you, but let me explain why. If you are an operational business, landscaper, plumber, electrician, you’re selling online and you’re just an LLC, that means you’re reporting as a Schedule C or a single-member LLC or a disregarded LLC. When that’s the case, yes, you are more likely to be audited and 15 times more likely to be audited as a Schedule C. However, you’re also paying way too much in tax. So what’s the solution? You move to the S-Corporation.
Matt’s Reaction:
Okay, well, yes, in a lot of cases, I’d agree an S-Corp is better from a tax standpoint. And it’s easy to do and as long as you’re profitable and you’re planning to stay that way, then switching over an S Corp almost always makes sense and is going to save you in the long run on taxes. But scaring people with the threat of audit, that I don’t agree with. One, because the audit rate is very, very low. So yes, S Corps in general may be audited a bit less than Schedule C’s. I have not heard the 15 times difference metric before. I don’t know where he got that number. I’d be skeptical that that’s really the right differential. But if we say that C Corp, or sorry, sole props are audited 1% of the time, and S Corps are audited 1/15 of that, .06%, if Schedule Cs are 1%, either way, right, the risk of audit is phenomenally low. And that’s before, if they really go through with laying off 45,000 of the 90,000 current IRS employees, then audits are going to go down even more. I would not make the switch because of fear of audit. That is not really a reasonable reason, in my opinion, to switch from an LLC to an S Corp, because there are some costs that go with becoming an S Corp that you don’t have as a single-member LLC, and that wasn’t mentioned in this video. You have a whole separate tax return to do and now you have the cost of payroll processing for yourself to put yourself on payroll. But if the math works and it’s just math, it’s not opinion, you can do the math and say under which scenario am I going to save the most money, and which one’s going to be the most beneficial from a tax standpoint. Then a lot of times the answer is yes, an S Corp is going to save you more money. So for that reason, I think it can make a lot of sense. From an audit risk standpoint, though, that is not a reason to make the switch.