LLC vs S-Corp in Hawaii

Hawaii imposes a state personal income tax and a state corporate income tax, and runs one of the most important state-level transaction taxes in the country, the General Excise (GE) tax. Those three facts drive the LLC vs S-corp choice for a trade business. Hawaii's Business Registration Division (BREG) at DCCA handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. The Hawaii Department of Taxation administers the state income taxes and the GE tax. A Hawaii LLC can elect to be taxed as an S corporation for federal purposes, and Hawaii conforms to the federal S-corp pass-through for state income tax as well. Hawaii LLC basics. - Articles of Organization filed with DCCA BREG under the Hawaii Uniform Limited Liability Company Act (HRS Chapter 428). - Single-member LLCs default to disregarded-entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with IRS Form 2553. - Annual filings through the BREG Hawaii Business Express portal. - A Hawaii LLC operating in construction also needs a GE tax license and, if the owner-manager is holding the contractor license, the RME relationship with the entity. Hawaii GE tax (the one tax that catches contractors off guard). - The GE tax is a gross-receipts tax, not a sales tax. It applies to nearly all business gross income in Hawaii, including contracting, at a state rate of 4.0% (4.5% on Oahu with the county surcharge; check the current surcharge for Hawaii, Maui, and Kauai counties). - A Hawaii contractor pays GE tax on gross receipts from jobs performed in Hawaii, with a narrow deduction for amounts paid to specialty-licensed subcontractors on the same job (the 'subcontractor deduction' under HRS Section 237-13(3)(B)) when properly documented. - The GE tax applies to LLCs, S corps, C corps, and sole proprietorships alike. Federal S corp election does not exempt an entity from Hawaii GE tax. Hawaii income tax for an S corp. - Hawaii conforms to the federal S-corp pass-through. A Hawaii S corp generally does not pay state corporate income tax on income passed through to shareholders; shareholders report their pro-rata share on Hawaii Form N-11 or N-15 and pay at Hawaii's individual income tax rates. - The S corp must file Hawaii Form N-35 (S-Corporation Income Tax Return) and issue Hawaii Schedule K-1 to each shareholder. Why a Hawaii trades shop might still elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Hawaii's state income tax applies in either case, and the GE tax applies in either case, so the S corp election is mostly a federal calculation with a state compliance overlay. Rule of thumb. Start as a Hawaii LLC. When annual profit after a reasonable owner wage is high enough that federal payroll tax savings clear the payroll, retirement plan, and accounting costs (ballpark, at least $40k to $50k of net profit after a reasonable W-2 salary), elect S corp. A CPA with Hawaii construction clients can run the breakeven for your numbers and confirm the current GE tax rate and any county surcharge, which change periodically.