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


2

Situation
Have formed a LLC in New York City. It is single member. Sole purpose is to sell mobile apps. Limited deduction opportunity. Running business part time. From home.

Questions

  1. I'm trying to get to the answer of at what income number do I pay less tax as a s-corp over a sole proprietorship, so I want to check are my below models for working out tax liability correct? 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? As this can avoid the GCT that you get from filing as a S-Corp

My Models

Say for net income of $100,000

They key levers seems to be a) what I deem a reasonable salary as beyond that I'm paying only the GCT (General Corporation Tax) b) what of my income is deemed to be generated from outside of NYC as this could result in lower tax rate

Filing as a Sole Proprietorship (which is what the IRS treats a single member)

  • Self Employment Taxes = 13.3% (realize this rate would drop if earning over the $110,100 max wage they can tax for social security)(as of 2012) (also realize that I can deduct 1/2 of SE tax against my income for federal,state and city tax)
  • UBT (Unincorporated Business Tax) = 4% of net income over $35K
  • Filing Fee =$25
    So that's:

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%

Filing as a S-Corp (which in NYC they treat as a corporation)

  • 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

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%

LLC Apps New York

asked Nov 24 '12 at 08:28
Blank
Drc
118 points
  • another thing to consider is that your rent/house depreciation may be tax-deductable – Solo 5 years ago
  • I wonder, where did you learn the things you already seem to know? Is there a book or brochure about small business taxation? – Solo 5 years ago
  • Research on web, and yes I bough a number of books form nolo – Drc 4 years ago
  • Your use of Sole Proprietorship and LLC as if they are the same thing had me confused. Why are you even considering a switch to an S-Corp? You paid an outrageous expense, compared to the rest of the nation, for the LLC. – Michael Wales 4 years ago
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1 Answer


1

You have a good general idea. But a couple things you are overlooking where an S-Corp makes most sense.

In case someone new comes to this question. Firstly an S-Corp is just a Standard C-Corp. You file your corporate paperwork the same with each state, but then make the S-Election with the IRS. You usually make this S-Election within 90 days of forming your corporation. The S-Election tells the IRS to treat you as a Subchapter coporation. S-Corp allows pass through income (where without it you are taxed twice, once at the corporate level, and then once again as personal income) With an S-Corp all the income passes through to its shareholders so there is no double tax. Also note that your LLC can also choose to be taxed as an S-Corp. Meaning an LLC can also have an S-Election and for tax purposes be treated as an S-Corp.

Here are the advantages of the S-Corp.

  1. Protection Liability is great. If you get sued your personal assets (outside the S-corp are protected)
  2. You can minimize your personal income taxes (employment taxes) by giving yourself a small reasonable salary. Your numbers of 75k for personal salary are really high. Typically its done like this. You give yourself a lower salary. Reasonable is what someone else would do the same job for. I am sure you can get away with a 24-36k salary as you can find someone to do the same coding work (even offshore) for the same salary. With the lower salary, only that amount is subject to Self employment tax.
  3. An S-Corp can remove its S Election and become a C Corp later. You hear a lot about being double taxed, but the second of the double tax is only applied when monies are pulled out. Say you are making 100k year now (s-corp) with a salary of 25k. The first 25k gets self employment taxes (which are usually double as employer and employee). The next 75k is really only taxed at state / federal levels. Say three years from now you are earning 500k a year through your corporation. It makes sense to drop the S- Election. Say you need 250k as a salary for your living expenses then. You can then salary yourself 250k (only the first 150k or so is subject to self employment tax before you hit the limit). The remaining salary is only taxed as personal income. Also the remaining 250k that is not paid out as salary can be kept in the business account and only taxed at the corporate level. It might eventually be taxed (when pulled out), but you can have a lower corporate tax on this income, and use it for business growth.

THe key rule is this. Use an S-Corp to minimize your Self Employment (medicare ss) taxes while you are small. THen jump to a C Corp when your business can use the capital more than you as a person can use the capital.

TO add to this mix. you can also have a C-Corp that owns many S Corps or LLCs. This is usually what you do when you want to expand into new ventures. You have one major C-Corp which you own 100% shares of, but then that C-Corp owns an S-Corp for each startup. So you can have an S-Corp for your mobile apps. An S-Corp for your advertising company, and an S-Corp for the pizza shop you bought all owned by your c-corp. From a tax basis all the s-corp income flows up tot he c-Corp. THis gives your financial planner a lot of wiggle room to shift things around to lower your tax burnden as well as offset any business income with losses.

Since your question is mainly based on Taxes. Look into 1. Lowering your Reasonable Salary. 2. Forming your S-Corp in DE where your filing fees are lower

answered Aug 29 '13 at 19:43
Blank
Frank
2,079 points
  • Awesome thanks. Would you have an estimate of how much extra paperwork a S-Corp is? – Drc 4 years ago
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