LLC vs S-Corp in Massachusetts

Massachusetts has a 5% flat individual income tax, plus a 4% surtax on the portion of taxable income above $1 million (effective for tax years beginning on or after January 1, 2023, under the constitutional amendment approved by voters in November 2022). Massachusetts also imposes a corporate excise tax on corporations doing business in the state at 8% of net income, plus a non-income measure. These rates shape the LLC vs S-corp math for a trade business. The Massachusetts Secretary of the Commonwealth's Corporations Division handles the entity filing. The IRS handles the federal tax classification via Form 8832 and Form 2553. A Massachusetts LLC can elect to be taxed as an S corporation. Massachusetts LLC basics. - Certificate of Organization filed with the Secretary of the Commonwealth's Corporations Division. - Filing fee is $500. - Annual Report required every year. The annual report fee is $500 for an LLC. That combined $500 formation plus $500-per-year carrying cost is high relative to many states, and it is a real cost to factor into the LLC-vs-S-corp breakeven. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. Massachusetts S corp basics. - Massachusetts accepts the federal S election. A federal S corporation is treated as an S corporation for Massachusetts purposes and files Form 355S. - Corporate excise on S corps is structured as a two-measure tax. An S corp pays the non-income (property or net-worth) measure of the corporate excise, plus an income measure that varies with the corporation's total receipts. When total receipts cross the thresholds set in MGL c.63 §32D and §39, an additional income-measure rate can apply. S corps below the threshold generally pay the non-income measure and their shareholders report the flow-through income on their Massachusetts individual return. - Shareholders report their share of S-corp income on Massachusetts Form 1, subject to the 5% individual rate, and the 4% surtax on the portion of Part B income above $1 million. - Massachusetts also offers an elective Pass-Through Entity (PTE) Excise under MGL c.63D. A qualifying pass-through (including an S corp) can elect to pay a 5% entity-level tax, and members receive a refundable credit on their Massachusetts individual return. This is a federal SALT-cap workaround, not a state tax increase. Whether to elect is a CPA decision based on each owner's tax facts. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Massachusetts has state unemployment insurance through the Department of Unemployment Assistance, and employer contributions to Paid Family and Medical Leave apply. Why a Massachusetts trades shop might elect S corp. The primary 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. Massachusetts' 5% individual rate still applies to both the wage and the distribution, so the state calculation is similar across forms. The savings are mostly on the federal side. Rule of thumb. Start as a Massachusetts LLC, knowing the $500 annual report is a real carrying cost. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, look at an S-corp election. A CPA with Massachusetts construction clients can run the breakeven for your numbers, factor in the corporate excise non-income measure, and advise on the PTE election and the 4% surtax threshold.