Author Topic: S-Corp or Sole Proprietorship?  (Read 159 times)

JeredA

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S-Corp or Sole Proprietorship?
« on: January 08, 2018, 10:35:19 PM »
Jeremy!

Saw your latest blog post on the TCJA - awesome. Your chart was the clearest visualization I?ve seen of the changes yet and the links at the end were especially helpful.

So, I?m planning to start a side business selling one of my apps and need to decide between a sole proprietorship vs. S-Corp.

Is there a clear winner given my high income from the day job?

Thanks and Happy New Year!!!

gocurrycracker

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Re: S-Corp or Sole Proprietorship?
« Reply #1 on: January 09, 2018, 12:35:16 AM »
As with most things, it depends. There is a point where cost of S-corp exceeds the benefits.

One of the main reasons people use S-corps is to minimize Self-Employment taxes. If you make $100k biz income, as sole proprietor you pay SE taxes on all of it, about $15k. As S-Corp, you only pay SE taxes on the reasonable salary, say $40k (so 6k SE tax.) The remaining $60k is a distribution that is SE tax free (but of course subject to fed and state taxes.) Since you already pay the max employee payroll taxes on your day job, your burden is half as much.

S-corps have to file a corporate tax return each year, which has a cost. Maybe you pay your CPA to prepare this. If cost is greater than SE tax savings, then better to be sole-proprietor. And vice versa.

One thing to consider: with sole proprietor you can hire your kids, and since it is a family business they don't have to pay payroll taxes at all. With S-corp they would. They can earn up to standard deduction each year completely Fed tax free (that's $12k in 2018, thanks to TCJA.) This can then be contributed to their Roth IRA and/or the companies solo 401k. See this post for more:
http://gocurrycracker.com/gccjr-for-hire/