

At what income number does S-Corp save you money over a Sole Proprietorship - drc

Situation<p>Have formed a LLC in NYC. It is single member. Sole purpose is to sell mobile apps. Running business part time. From home.<p>Questions<p>1.	At what income number do I pay less tax as a s-corp over a sole proprietorship Right now I believe it's very close to $133K in revenue. This is from following all the way through to after income taxes are applied. 
2.	What time period each tax year can I switch tax elections from S-Corp to Sole Prop or vice versa in future?
3.	How often can I switch status?
4.	If your selling software via the app store, but do all the development at home in NYC, does that constitute all sales from NYC?<p>My Models<p>Say for net income  of $100,000<p>They key levers seems to be a) what I deem a reasonable salary for s-corp b) what of my income is deemed to be generated from outside of NYC<p>Filing as a Sole Proprietorship (which is what the IRS treats a single member)<p>•	Self Employment Taxes = 13.3% (realize this rate would drop if earning over the $110,100 due to limit on SS tax)(as of 2012) (also realize that I can deduct 1/2 of SE tax against my income tax)
•	UBT (Unincorporated Business Tax) = 4% of net income over $35K 
•	Filing Fee =$25<p>Social Security Tax (part of SE)     $10,400    
Medicare (part of SE)    $2,900    
UBT Tax      $2,600    
Filing Fee     $25    
Sole Propetiership: Net Income after filing + SE tax, but not before income taxes     $84,075     rate of 15.93%<p>Filing as a S-Corp (which in NYC they treat as a corporation)<p>•	NYC Corporate Tax - 8.85% of NYC net income or 8.85% of salaries + 15% of 30% of net income
•	SE Tax on "reasonable salary" - I'm using a number of $75K number, not sure if this is right. 
•	Biennial Statement      $4.50<p>Reasonable Salary     $75,000
NYC Corporate Tax   $6,969
SE Tax on Income     $9,975
Biennial Statement      $4.50
Claim none outside     $83,051  rate of 16.95%
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codegeek
I run an S-corp (one man) and wish there was a simple answer to this. There
are way too many factors to consider before getting to any conclusion. The
biggest advantage of an S-corp is the ability to save on the payroll taxes
that the employer has to pay. But that really depends on how much you make,
how much you take in salary/W-2 etc. But again, there are other costs of
running an S-corp that add up really fast. For example, the accounting and
taxes are much more complicated for S-corps and you certainly need a good CPA
for it.

I suggest you talk to at least 2-3 CPAs and get an idea. Even the CPAs differ
in their understanding and preferences. My CPA insists that S-corp is good for
me while another one I spoke to kept telling me to switch to LLC.

In general, you need to consider the following factors:

1\. Social security tax portion of employer. This has a cap at about 110K i
think in 2012. So any income over that, does not matter anyway. FOr 2012, the
rate was 6.2%. lets say you earned 100K but only paid yourself 75K with
S-corp. At a high level, you will save almost 2K in ss taxes portion of the
employer.

2\. Medicare tax portion of the employer. This one is huge since there is no
cap. So the less you pay in salary, more you save in tax.

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eaurouge
As an LLC, you may elect to file (with the IRS) as an S-corp within the first
75 days of your calendar year. You can't just yo-yo back and forth from one
filing classification to another so you should take some time considering the
consequences. See <http://answers.onstartups.com/> for answers on this topic.

Some LLCs make this election so they can take a distribution at the end of the
year at a lower tax rate. The IRS monitors this, and expects you take a
"reasonable salary" as income. I recently made the election for similar
reasons, but also to allow me to run my company more like a startup, and less
like a consulting service.

There's enough information out there to make a decision, I think, but if
you're still in doubt get an accountant.

~~~
drc
I assume most people use the regular calendar year, as their year?

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lifeguard
Ask an accountant

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rprasad
The IRS does not treat a sole proprietorship as a "single-member". It ignores
the existence of the sole proprietorship for tax purposes, as do the states
(generally). In other words, _you_ and the business are the same in the eyes
of the tax codes. An S-Corp which has a single member is _also_ treated as a
disregarded entity by the IRS. However, states differ on their treatment of
S-Corps. Most states follow the IRS in disregarding the S-Corp entity, but a
few do not.

Fee-wise, the differences are immediate. You must pay fees to the state and
federal government related to your corporate entity. The total amount depends
on your state.

Tax-wise, the difference is minimal, but the S-Corp form does make it easier
to take and support deductions because you will probably maintain separate
records for your business. Sole proprietors are audited more frequently by the
IRS because they generally do not keep proper or sufficient records
delineating the _business_ spending. States differ on the taxes they impose on
business entities.

Liability-wise, the difference is immediate and substantial. S-Corps offer
limited liability, meaning that generally the S-Corp's liabilities are not
yours. In practice, banks won't make loans to S-Corps unless its owners agree
to waive limited liability, and if the S-Corp is not properly capitalized
(i.e., does not maintain proper insurance or reserves to cover liabilities)
then courts will ignore the limited liability shield. However, sole
proprietorships offer no liability protections--your liabilities and the
business liabilities are one and the same: i.e., if your business goes under,
creditors can go after your house.

Self-employment taxes: A sole proprietor owes self-employment taxes. These
taxes _include_ your social security contribution. You would not necessarily
pay self-employment taxes if you use the S-Corp form, if for example, you pay
yourself a salary up to the respected salary limit and properly treat the
remainder of distributions as potentially self-employment income.

You really need to talk to an accountant and/or lawyer about this.

~~~
geekfactor
FWIW, the OP seems to be equating "sole proprietorship" and the disregarded
entity status of their LLC. As such, the liability cautions you make might not
apply directly to their situation.

~~~
drc
Yup, that's right - I thought IRS treated a single member LLC as a sole
proprietorship for tax purposes. I guess the correct term is disregarded
entity. Either way the definitions were specific to the tax status and
separate to the liability definition, which is yes a LLC.

