"If you move to S Corp, you will save a ton in taxes because of how much less self employment taxes you pay."
This is common advice I see thrown around.
But... this is only half the story.
Let's take a real look at the numbers.
Let's say your business has $300k of profit. This means that right now you would pay 15.3% self employment taxes to $168,600 = $25,795.
Note: $168,600 is the social security wage base which is why it stops here.
Then from $168,600 to $300,000, you pay 2.9% for additional medicare tax = $3,810.
But... you also get the qualified business income deduction (QBID) which is 20% of business profits.
20% of $300,000 = $60,000.
A huge deduction.
At the 24% tax bracket, that reduces your taxes by $14,400.
Then you could also put in $23k to a solo 401(k) on the employee side and 20% of business profits on the employer side. This means you could get to the max $69,000 in for 2024.
So now what would happen if you moved to being an S Corp?
Most just look at self employment taxes, but this is only one variable.
But let's start there.
Let's say you move to being taxed as an S Corp and pay yourself a reasonable salary (depends on the job) of $100,000.
You would then only pay self employment taxes to $100k = $15,300 which is ($29,500 - $15,300) = $14,200 less.
But now your profit is $200k since you paid yourself a salary of $100k.
Your QBID = 20% x $200k = $40k. This means you would get $20k less of that deduction which is $4,800 less in tax savings.
Then... with a solo 401(k), you could put in $23k on the employee side and only 25% of salary on employer side = $25,000. That is $21,000 less.
So you save $14,200 on self employment taxes, but you get $20k less of QBID so now you are at tax savings of $9,400.
Then you can get in $21,000 less to a solo 401(k), so that would be $21,000 x 24% = $5,040.
Total tax savings of S Corp = $4,360.
But then you have increased fees by:
I would estimate all this to be at least $2,500.
Result: Yes, S Corp saves you some here. But most just say you save $14,200 so you should switch when that is not the full story.
After added costs it's probably about $2,000.
The moral of the story is that S Corps can be great, but they are not the end all be all.
There are many situations where it saves you a ton, like when you would get no QBID because your AGI is too high and you have no salaries (We will go through an example showing this next week).
Then other times it won't save you money.
You need to do the analysis.
Financial Advisor