Author Topic: S-Corp or Sole Proprietorship?  (Read 2506 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/

clubsoda

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Re: S-Corp or Sole Proprietorship?
« Reply #2 on: April 11, 2018, 03:12:24 PM »
This is a very tough call when you're making enough money to really be viable, but aren't really rolling in the dough....

I switched from sole proprietor to S-Corp for 2016. One thing that was a tough adjustment and learning curve was having to deal with a payroll processing company. They wouldn't jive well with where I have my retirement accounts, it was hard to shut off the solicitation emails from them, they messed up a couple things and I had to pay my CPA to fix the way the contributions were designated. As someone with no employees who finds it hard to find independent contractors competent to do any of my tasks (common in my industry, really....) suddenly it felt like I had some idiots to manage.

That said, it has been a great tax benefit compared to the hassle factor.

And, it wasn't any benefit to me the first 5 years I was in business. It made more sense for me to just deal with SE tax up to a point, and the overhead was simpler. Not anymore.

If you're new to business, or this particular business is new, I'd just start out as a sole proprietor but keep a close eye on your earnings and work closely with a CPA to know where you are, since there are deadlines for electing to be an S-Corp (I can't remember what it is).

I'm not a CPA so this is not tax advice.