I’m encountering more and more sole proprietors who want to form S-corps so they can save on taxes.
It’s a good strategy — if you know what you’re getting into.
The problem I encounter with these clients is: almost all of them engage in mystical thinking about the wonders of S-corps.
“Form an S-corp and the taxes just magically disappear!”
They seem totally baffled when I point out things such as:
- You have to figure out what your salary will be, and it has to be reasonable
- Yes, you really do have to pay yourself a salary
- This means payroll
- For a lot of solo operators, payroll is something they have no interest in dealing with because in my experience, almost all sole proprietors are Joe the Window Washers who just want to run their business and be left alone
- No, you can’t just “1099 yourself,” even though your brother-in-law who has a drywall business does this (people ALWAYS — like literally almost 100% of the time — use their brother-in-law as an example when trying to justify coloring outside the lines with taxes)
- Yes, you really do have to set up payroll and file quarterly 941s and make tax deposits
- You have to file a corporate tax return, which means an extra layer of headaches and bureaucracy and fees
- You have to treat your new S-corp as a separate entity — you can’t mingle personal and business like you can when you’re a sole proprietor
- Yes, you really do have to set up payroll
- To repeat one more time: yes, you really do have to set up payroll and it can be a big pain for you to deal with
If you understand these things, then S-corps can be a great way to save on self-employement/FICA taxes.
But if you go into it naively believing that S-corps are full of rainbows and unicorns and tax savings with no headaches or extra “stuff” for you to deal with, you’re going to be overwhelmed with what you’ve gotten into. I know because I deal with this all the time with my clients.
So go ahead and form that S-corp … just beware of what you’re getting into.