{"id":3893,"date":"2021-11-18T03:48:24","date_gmt":"2021-11-18T03:48:24","guid":{"rendered":"https:\/\/www.ua-cpas.com\/blog\/?p=3893"},"modified":"2021-11-23T20:02:21","modified_gmt":"2021-11-23T20:02:21","slug":"schedule-c-vs-s-corporation","status":"publish","type":"post","link":"https:\/\/www.ua-cpas.com\/blog\/index.php\/2021\/11\/18\/schedule-c-vs-s-corporation\/","title":{"rendered":"Sole Proprietor vs S-Corporation\u00a0 \u00a0 \u00a0"},"content":{"rendered":"

\u00a0 \u00a0\"\"<\/span><\/strong><\/p>\n

Converting from Sole Proprietor to Sub-S has both tax savings and risks. Review them before making the move.\u00a0 The structure you choose affects how your business is taxed and the degree to which you can be personally liable. Here\u2019s a comparison of these two popular business structures.<\/p>\n

Sole Proprietor<\/span><\/strong>\u00a0This is a classic structure for single-owner businesses. No separate business entity is formed. A sole proprietorship does not limit liability, but insurance may be purchased. You report your business income and expenses on your personal income tax return (Schedule C of Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don\u2019t take paychecks themselves.
\nS-Corporation<\/span> <\/strong>A corporation is a separate legal entity that files its own corporate income tax returns. Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they\u2019ve personally guaranteed. If you make a \u201cSubchapter S\u201d election, shareholders will be taxed individually on their share of corporate income. This S-Corporation structure generally avoids federal income taxes at the corporate level.
\nAre there additional costs to being an S- Corporation?<\/span><\/strong> The switch from a Schedule C to an S-corporation increases the costs of doing business. Here are some of the additional expenses:
\n\u2022<\/span><\/strong> Minimum state taxes
\n\u2022<\/span><\/strong> Accounting fees for preparation of separate corporate tax return
\n\u2022<\/span><\/strong> Payroll servicing costs -if business had no employees as a Schedule C, the owner now is required to receive a salary
\n\u2022<\/strong> Unemployment tax on owner\u2019s salary, in NJ is almost $1,000<\/p>\n

Are there any tax savings?<\/span><\/strong> The tax you save is the steep 15.3% self-employment (SE) tax. You pay it on the entire sole proprietor earnings. You only pay the SE tax on the salary portion of your S-Corp earnings. For example, if there is net income of $142,800 (the Social Security max wage base for 2021) and you pay yourself a salary of $50,000, it saves you 15.3% of the difference or approximately $14,000. The greater the difference between your wages and net income, the greater the savings of the SE tax.<\/p>\n

Both sole proprietorships and S-Corporations generally offer no difference in the calculation of income tax only the SE tax.<\/p>\n

Any caveats?<\/span><\/strong> There are many considerations. Here are the main concerns:
\n\u2022<\/span><\/strong> The IRS expects you to take a \u201cfair\u201d salary from your business, known as Reasonable Compensation. E.g., A solo physician or engineer with net income of $200,000 can\u2019t justify a salary of only $50,000. Determination of reasonable compensation is complex and based on many factors. At Urbach & Avraham we make these calculations for use in business valuations in both litigation and non-litigated matters. We can assist you in determining a defensible figure should you decide to operate as a Sub-S Corporation.<\/p>\n

More often than not, an S corporation has only one owner. This allows the owner to set salaries for employees, including his own salary. The IRS is sensitive to the potential for manipulating the tax laws in this area and is applying extra scrutiny to the salaries of S corporation owners.
\n\u2022<\/span> If you are injured or disabled, you can\u2019t claim lost wages of $200,000 but rather only the W-2 wages of $50,000
\n\u2022<\/strong><\/span> Pension contributions are only made on wages of an S-corporation, not on the net income. The lower the wages, the smaller the retirement benefits
\n\u2022<\/span><\/strong> Your Social Security benefits are calculated on an average of 35 years of wages. The lower the wages, the lower the benefits
\n\u2022<\/span><\/strong> Your Qualified Business Interest Deduction may decrease or increase \u2013 based on various factors<\/p>\n

Which is suitable for my business? Schedule C or S-Corporation?<\/span><\/strong>
\nDifferent business entities offer different advantages. You should consider all of them and speak to a tax professional at Urbach & Avraham, CPAs to determine which advantages can help you the most given your current circumstances. You may discover, over time, as your circumstances change, so, too, does your choice of preferred business entity.<\/p>\n","protected":false},"excerpt":{"rendered":"

\u00a0 \u00a0 Converting from Sole Proprietor to Sub-S has both tax savings and risks. Review them before making the move.\u00a0 The structure you choose affects how your business is taxed and the degree to which you can be personally liable. Here\u2019s a comparison of these two popular business structures. Sole Proprietor\u00a0This is a classic structure […]<\/p>\n","protected":false},"author":3,"featured_media":3900,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4,222,14,20,22,24,23],"tags":[250,251],"class_list":{"0":"post-3893","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-small-business-forum","8":"category-income-taxes-staffing-agencies","9":"category-medical-practices","10":"category-staffing-agencies","11":"category-tax-tips-for-individuals","12":"category-taxes-medical-practices","13":"category-taxes","14":"tag-choice-of-entity","15":"tag-schedule-c-vs-s-corp","16":"entry"},"_links":{"self":[{"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/3893","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=3893"}],"version-history":[{"count":5,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/3893\/revisions"}],"predecessor-version":[{"id":3910,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/3893\/revisions\/3910"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/media\/3900"}],"wp:attachment":[{"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=3893"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=3893"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ua-cpas.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=3893"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}