04/10/2025
🚨 IMPORTANT FOR BUSINESS OWNERS 🚨
Sole Proprietor vs. LLC (S-Corp Tax Election)
Deciding between a sole proprietorship and an LLC taxed as an S-Corp can significantly impact your tax liability. Here's a side-by-side comparison:
1. Sole Proprietorship:
- Total Income: $150,000
- Self-Employment Tax: 15.3% of $150,000 = $22,950 (half deductible)
- Federal Income Tax: Roughly $25,000
- Total Estimated Taxes: $47,950
2. LLC Taxed as an S-Corp:
- Total Income: $150,000
- Owner’s Salary: $60,000
- F**A Taxes: 7.65% of $60,000 = $4,590
- Federal Tax on Salary: Approx. $11,247.50
- Distributions: $90,000
- Federal Tax on Distributions: Approx. $15,747.50
- Total Estimated Taxes: $31,585
The Big Difference:
With a sole proprietorship, you pay self-employment tax on the entire income. With an S-Corp, it only applies to your salary, not your distributions.
Potential Tax Savings: $16,365
Key Takeaways:
- S-Corps can be more tax-efficient as income grows
- Salary must be “reasonable” to stand up to IRS scrutiny
- Sole props are easier to manage but may lead to higher taxes
- Always consult a tax professional to determine what’s best for your situation
