LLC vs S-Corp in New Mexico

New Mexico has a graduated personal income tax ranging from 1.50 percent to 5.90 percent (effective tax year 2023 and after) and a graduated corporate income tax with rates currently at 4.8 percent on the first $500,000 of net income and 5.9 percent above that, plus the corporate franchise tax of $50 per year for each corporation and S corporation. New Mexico also imposes the gross receipts tax (GRT) on most business services, which is a transaction-level tax separate from income tax. Verify current rates on the NM Taxation and Revenue Department site (https://www.tax.newmexico.gov/) before relying on them. The New Mexico Secretary of State handles entity filing. The IRS handles tax classification via Form 8832 and Form 2553. A New Mexico LLC can elect to be taxed as an S corporation. New Mexico LLC basics. - Articles of Organization filed online with the NM Secretary of State Business Services (https://www.sos.nm.gov/business-services/). The standard filing fee is $50. - No annual report is required for a domestic NM LLC. New Mexico is one of the few states with no LLC annual report. - 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. - Gross receipts tax (GRT). New Mexico imposes GRT on most construction services under NMSA 7-9. The rate is the combined state + local GRT at the location of the business or project, typically 5.125 percent to 8.9375 percent. GRT is a business-level transaction tax, not a sales tax on the customer, but most contractors pass the GRT through on their invoices. Construction services to a homeowner are generally taxable; certain subcontractor transactions qualify for a deduction. Registration for a CRS identification number with NM Taxation and Revenue is mandatory for any business subject to GRT. New Mexico S corp basics. - New Mexico recognizes the federal S election. An S corporation files NM Form S-Corp, New Mexico S-Corporation Income and Franchise Tax Return. Income generally passes through to shareholders and is reported on their individual NM returns at graduated rates up to 5.90 percent. - Franchise tax. Every S corporation (and every C corporation) pays a $50 annual corporate franchise tax in New Mexico, regardless of income, under NMSA 7-2A. The franchise tax is separate from the income tax. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. New Mexico imposes state unemployment insurance (SUI) tax through the Department of Workforce Solutions once the business crosses the wage threshold. Why a New Mexico trades shop might elect S corp. The main driver 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. New Mexico's graduated state income tax applies to the owner's pass-through income either way, so the state-tax side is roughly neutral between LLC and S corp (excluding the $50 S corp franchise tax). The federal payroll-tax math is where the decision is made. Rule of thumb. Start as a NM LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs (plus the $50 S corp franchise tax), elect S corp. A CPA with New Mexico construction clients can run the breakeven for your numbers and confirm the NM filings, GRT registration, and CID qualifying-party requirements for the entity you choose.