If you are a business owner, there are several different ways you can file your tax return. Here is a quick overview of the two most common options - sole proprietor vs S-Corporation and why S-Corporation can save you thousands.
Option #1 - Sole Proprietor - A sole proprietor is the default and most common way a sole business owner can file their tax return. This option is the easiest and usually the most expensive tax-wise. The business activity is reported on Schedule C and the profit or loss is used to calculate the owner's overall taxable income.
As mentioned, Schedule C is usually the most expensive way for a business owner to file their tax return. Why? Something known as the self-employment tax. A sole proprietor will owe the self-employment tax on all business income + their ordinary tax rate. The self-employment tax rate is 15.3%. A business owner with an income of $30,000 faces self-employment taxes of $4,000+! That is a lot of tax to pay.
Option #2 - S-Corporation - The second most common way a business owner can file their tax return is S-Corporation. S-Corporation is not available by default and that is the primary reason that people don't use it. Don't be the business owner who finds out about S-Corporation after you get stuck with a tax bill from filing a Schedule C. The business owner with $30,000 in income can largely avoid the 15.3% self-employment tax and save thousands.
S-Corporation does require the taxpayer to form an entity and LLC is the most popular. An LLC is a legal entity and can be treated multiple different ways for tax (and S-Corporation is not the default!)
Everyone's situation is unique. JRG Taxes can help figure out what tax classification works best for and your business. We also offer LLC set-up which streamlines the whole process and makes your life easy and can add thousands of dollars to your bottom line.
JR Gramstad CPA