Level 6

S corp savings vs sole Prop

24 replies
160 views

Hi, am I missing anything major with the calculations below? Sole prop looking to convert to S corp. Thanks!

	Sole Prop	S Corp
Net income	$111,835.00	$36,835.00
Wages	$0.00	$75,000.00
SE tax deduction	$7,850.00	$5,738.00
QBI Deduction	$7,375.00	$7,367.00
Solo 401K deduction	$43,151.00	$41,250.00

Income Tax	$18,710.65	$20,118.00
SS+Medicare	$15,699.00	$11,476.00
CA S corp tax	0	$2,177.53

Total tax	$34,409.65	$33,771.53	$638.12	Savings

Tax Talk

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strongsilence

Level 10

CA tax is 1.5% X net income. I don't know how you get $2,177. Maybe you are not showing CA adjustments from Federal.

QBI deduction looks right (if there is no capital gain income.)

abctax55

Level 15

And the CA 1.5% is 'inclusive' of the $ 800.00 minimum tax, so it doesn't kick in until CA NI is more than $ 53,333.

HumanKind... Be Both

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ptax255Author

Level 6

Isn't $800 the minimum to be paid? Also if I'm not mistaken it's waived for first year? I'm also including as CA tax 1.1% SDI on wages.

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TaxGuyBill

I haven't analyzed your numbers, but at first glance it looks reasonable.

Based on your numbers, I certainly hope he doesn't elect to be taxed as a S-corporation. The costs to file the 1120-S, 941s, 940, W-2, pay unemployment, and reduced potential Social Security benefits would make the S-election seem like a bad idea.

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strongsilence

Level 10

Payroll processing costs

Legal fees for incorporation

Costs for another tax return, annually

Your fees for guidance and CAS related to reasonable compensation, health insurance, accountable plans and other S Corp matters

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strongsilence

Level 10

The PTE deduction is another factor and might be a significant benefit.

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ptax255Author

Level 6

Agreed. I didn't inlcude it because for 2024 election, payment had to be made by June.

PATAX

Level 12

Based on what you have provided and on what the others have said, it doesn't look like there's much of an advantage to change. Don't forget that S corporations that do not pay what is deemed as reasonable compensation are prone to IRS audit, which could lead to a full audit. Audits are expensive and nerve-racking to the client, even if it is eventually a no change audit. If the client wants limited liability, can you become a sole member LLC/disregarded entity?

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ptax255Author

Level 6

Updated based on everyone's feedback. Thanks! Curious, what amount do you all think it's worth all the extra work of an S corp?

	Sole Prop	S Corp
Net income	$111,835.00	$36,835.00
Wages	$0.00	$75,000.00
SE tax deduction	$7,850.00	$5,738.00
QBI Deduction	$7,375.00	$6,681.87
Solo 401K deduction	$43,151.00	$41,250.00
CA Tax deduction		$1,625.00
PTE		$3,425.66

Income Tax	$18,710.65	$18,590.07
SS+Medicare	$15,699.00	$11,476.00
CA S corp tax	0	$1,625.00

Total tax	$34,409.65	$31,691.07	$2,718.58	Savings

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strongsilence

Level 10

I don't have an opinion on the amount that makes it worth it.

I advise running several scenarios of nontaxable distributions vs. wages then analyzing those outcomes before making a decision. Maybe consider 2024 and 2025 if possible.

And, as someone noted earlier, there are impacts on Social Security for different wage amounts.

It's complicated right, but I think the timing principle is a big consideration: Does the client save taxes now (and take advantage of that savings with investing it prudently) in order to defer taxes much later?

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