Sole Proprietorship vs a S-corporation!
Welcome to Modi CPA!
This is my first video on a series of Tax Topics.
We already have plenty of Tax blogs on our website at ModiCPA.com, but as some people are more visual, thought this would be a cool way to reach out to more viewer.
Today’s Topic is Sole Proprietorship vs a S-corporation!
let’s look at Dr. Johnson here, a Dentist that makes about $500,000 from his Dental Practice.
He currently operates his business as a Sole-Proprietorship (meaning his the sole owner of his practice) and he is deciding if he should operate as a S-Corporation for tax purposes.
So let’s see if we can help Dr. Johnson make a decision on what would be beneficial to him from a tax point of view.
For simplicity, let’s say his graduated tax rate is 35%.
And now Let’s do some math for Dr. Johnson whom is a 35 year old dentist with no dependents looking for his soul-mate.
After taking his income of 500,000 dollars and taking his 2016 standard deduction, other deductions of $4,000 and self-employment tax deductions. His regular taxable income will be 475,103, in which he’ll end up paying $166,286 (475103*35%) in Regular Taxes.
In addition, he’ll also pay self-employment taxes (AKA SE Tax) $29,194 as he is considered Self-employed and operates as Sole-Proprietorship.
Overall, he’ll end up paying 195,480 dollars in taxes on his Dental income due to not only his Regular tax rate but also due to his SE Tax.
Now if Dr. Johnson, decides to operate his business as a S-corporation, there will be few changes, in that he’ll have to give himself a reasonable salary because legally a corporation is considered a person, and if you were doing work for another person, it’s rightfully expected that you get paid for it.
let’s say his salary 118,500 dollars.
Now again, let’s do some math for Dr. Johnson as a S-corporation.
After taking his income of 500,000 – Standard deduction, Other deductions of 4,000 dollars, and payroll tax deductions,.
His Taxable income will be $480,635 and his regular taxes will be $168,222.25
In addition, he’ll pay Employee Taxes of $9,065 from his personal payroll and pay another $9,065 as S-Corp payroll taxes.
So, Total taxes paid will be 186,352.25
Thus, in a given year, having a S corporation will save Dr. Johnson $9,127.75 versus having a Sole proprietorship.
If he has a S-corporation for 5 additional years that over 45,000 dollars he’ll save, which he can use towards his dental clinic, investments in stocks or interest bearing portfolios, or to take his potential significant other on romantic dates.
Even though in this scenario, it is quite a bit of money he’ll save if we look at it from long term point of view.
But It’s always best to discuss with your friendly accountant and attorney to consider all factors such as:
- Filing federal and state payroll forms
- Accounting and legal fees associated with S-corporation
- Annual Franchise taxes depending on the state.
- Incorporation fees
- Other formal paperwork that an S-corporation requires, and
- Most importantly your time!!
I hope this video gives you a better insight on S corporation vs Sole Proprietorship! And if this video helped you in anyway, feel free to check out some of our other blogs at www.modicpa.com – the link is in the description below and don’t forget to subscribe, like and leave comments below on tax topics you would like to discuss in the future.
If you have any questions on how we can help you or would like learn more about the firm. Please visit us Modicpa.com or email us at Ravi@modicpa.com. We are Tax Accountants located in The Colony Texas.
Disclaimer: The information provided in this video is for Educational and general information only, so does NOT take into account your objectives, financial situation and needs.This video is not a substitute for proper advice from a licensed attorney, accountant, and/or another service provider.