As a sole proprietor you
are subject to the 15.3% Self Employment/FICA tax on all of your
earnings. The S corporation, on the other hand, pays you a deductible
salary (which is subject to FICA), but then flows through your profit
to you via a Schedule K-1. This K-1 income allows permanent deferral
of the FICA tax. The S corporation is designed to legally help the
small business owner by saving him tax money. Please take a look at
the following comparison.
|
|
LLC,
LLP, Partnership, Sole Proprietorship |
C
Corp. |
S
Corp. |
| Income
|
$80,000
|
$80,000
|
$80,000
|
| Expenses
|
($45,000) |
($45,000) |
($45,000) |
|
|
|
|
|
| Gross
Profit |
$35,000
|
$35,000
|
$35,000
|
| Salary
|
$0 |
($20,000) |
($20,000) |
| Taxable
Income |
$35,000
|
$15,000
|
$15,000
|
| Entity
Tax |
$0 |
$2,250
|
$0 |
|
|
|
|
|
| First
Year |
|
|
|
| FICA/SE
(15.3%) |
$5,355
|
$3,060
|
$3,060
|
| Federal
Income (21%) |
$7,350
|
$4,200
|
$4,200
|
| K-1 Tax
(21%) |
$0 |
$0 |
$3,150 |
| Total Tax
|
$12,705
|
$9,510 * |
$10,410
|
|
|
|
|
|
| Second
Year |
|
|
|
| FICA/SE
(15.3%) |
$0 |
$1,951
|
$0 |
| Federal
Income (21%) |
$0 |
$2,678 |
$0 |
| Total Tax
|
$0 |
$4,629 * |
$0 |
|
|
|
|
|
| 2 Year
Tax |
$12,705 |
$14,139 |
$10,410 |
Difference between
Proprietorship and S Corporation
$12,705 - $10,410 = $2,295
* 1st year is tax on
W-2, 2nd year is tax on $12,750 ($15000 prior year taxable less
$2,250)
Please note this representation is only
an example. It is being used for demonstration purposes, it does not
take into consideration exemptions, deductions, fling status or any
other significant tax matters Your situation may not yield the same
results. Please contact a tax professional before making any financial
decisions. |
