Sole Proprietor vs. S-Corp:
Small business owners frequently ask whether they should convert their
Sole Proprietorship to an S Corporation. From a tax and financial
standpoint, look at the scenarios listed below. If you think your business
matches up to an S Corp scenario, talk to me about the other
considerations that are involved.
Sole Proprietorship to an S Corporation. From a tax and financial
standpoint, look at the scenarios listed below. If you think your business
matches up to an S Corp scenario, talk to me about the other
considerations that are involved.
| John Rukosky of Rukosky & Associates |
We believe there is a critical difference
between our firm and others that
perform only financial planning: while
others will refer you to a tax advisor
after having designed a financial plan
for you, at Rukosky & Associates
Financial Group Inc. you are
consulting with a tax accountant, so
we know your plan will succeed.
between our firm and others that
perform only financial planning: while
others will refer you to a tax advisor
after having designed a financial plan
for you, at Rukosky & Associates
Financial Group Inc. you are
consulting with a tax accountant, so
we know your plan will succeed.
Contact us:
508 Driewood Court
Raleigh, NC 27609
Office: 919.781.9319
Mobile: 919.906.4234
Fax: 919.791.0990
Email: john@rafginc.com
Raleigh, NC 27609
Office: 919.781.9319
Mobile: 919.906.4234
Fax: 919.791.0990
Email: john@rafginc.com
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Example One (Part I) Assumptions
W-2 Income For Both Wage-Earners $ 60,000
Net 1099 Income From Side Business (After Expenses) $ 15,000
Total Earned Income $ 75,000
Subtract One-Half Self-Employment Tax $ 1,060
Subtract $15,000 Itemized Deductions $ 15,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 45,740
Income Tax $ 6,104
Subtract Child Tax Credit $ 2,000
Add Self-Employment Tax $ 2,120
Total Tax Owed By This Family: $ 6,224
Example One (Part II) Assumptions
W-2 Income For Both Wage-Earners $ 60,000
W-2 From S-Corporation $ 4,000
Ordinary Income from S-Corporation $ 11,000
Total Adjusted Earned Income $ 75,000
Subtract $15,000 Itemized Deductions $ 15,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 46,800
Income Tax $ 6,269
Subtract Child Tax Credit $ 2,000
Taxes Owed By This Family $ 4,269
Tax Difference of S-Corp vs. Sole Proprietorship $ 1,955
Subtract 7.65% of $4,000 W-2 for FICA Tax Obligation $ 306
Subtract .8% for Federal Unemployment Tax Obligation $ 32
Subtract North Carolina Unemployment Tax Obligation $ 48
Net Annual Gain For This Family $ 1,569
A Side Note:
If the tax savings for this family was $1,569 per year for 30 years,
and they did not even invest the money, they would have $47,070
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$191,969
Example Two (Part I) Assumptions
W-2 Income For Both Wage-Earners $ 60,000
Net 1099 Income From Side Business (After Expenses) $ 30,000
Total Earned Income $ 90,000
Subtract One-Half Self-Employment Tax $ 2,120
Subtract $17,500 Itemized Deductions $ 17,500
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 57,180
Income Tax $ 7,821
Subtract Child Tax Credit $ 2,000
Add Self-Employment Tax $ 4,239
Total Tax Owed By This Family: $ 10,060
Example Two (Part Two) Assumptions
W-2 Income For Both Wage-Earners $ 60,000
W-2 From S-Corporation $ 7,500
Ordinary Income from S-Corporation $ 22,500
Total Adjusted Earned Income $ 90,000
Subtract $17,500 Itemized Deductions $ 17,500
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 59,300
Income Tax $ 8,144
Subtract Child Tax Credit $ 2,000
Taxes Owed By This Family $ 6,144
Tax Difference of S-Corp vs. Sole Proprietorship $ 3,916
Subtract 7.65% of $20,000 W-2 for FICA Tax Obligation $ 574
Subtract .8% for Federal Unemployment Tax Obligation $ 56
Subtract North Carolina Unemployment Tax Obligation $ 90
Net Annual Gain For This Family $ 3,196
A Side Note:
If the tax savings for this family was $3,196 per year for 30 years,
and they did not even invest the money, they would have $95,880
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$391,017
Example Three (Part I) Assumptions
W-2 Income For Both Wage-Earners $60,000
Net 1099 Income From Side Business (After Expenses) $80,000
Total Earned Income $140,000
Subtract One-Half Self-Employment Tax $ 4,742
Subtract $20,000 Itemized Deductions $ 20,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $102,058
Income Tax $ 18,630
Subtract Child Tax Credit $ 700
Add Alternative Minimum Tax $ 274
Add Self-Employment Tax $ 9,484
Total Tax Owed By This Family: $ 27,688
Example Three (Part Two) Assumptions
W-2 Income For Both Wage-Earners $60,000
W-2 From S-Corporation $20,000
Ordinary Income from S-Corporation $60,000
Total Adjusted Earned Income $140,000
Subtract $20,000 Itemized Deductions $ 20,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $106,800
Income Tax $ 19,815
Subtract Child Tax Credit $ 500
Add Alternative Minimum Tax $ 322
Taxes Owed By This Family $ 19,637
Tax Difference of S-Corp vs. Sole Proprietorship $ 8,051
Subtract 7.65% of $20,000 W-2 for FICA Tax Obligation $ 1,530
Subtract .8% for Federal Unemployment Tax Obligation $ 32
Subtract North Carolina Unemployment Tax Obligation $ 214
Net Annual Gain For This Family $ 6,275
A Side Note:
If the tax savings for this family was $6,275 per year for 30 years,
and they did not even invest the money, they would have $188,250
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$767,720
- Two income-earners in household.
- Two children: tax credit applies
- Married Filing Joint tax status
- Side-business operated as a Sole Proprietor
- $15,000 in itemized deductions
W-2 Income For Both Wage-Earners $ 60,000
Net 1099 Income From Side Business (After Expenses) $ 15,000
Total Earned Income $ 75,000
Subtract One-Half Self-Employment Tax $ 1,060
Subtract $15,000 Itemized Deductions $ 15,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 45,740
Income Tax $ 6,104
Subtract Child Tax Credit $ 2,000
Add Self-Employment Tax $ 2,120
Total Tax Owed By This Family: $ 6,224
Example One (Part II) Assumptions
- The assumptions are the same as above, EXCEPT the
business has been incorporated and taxed as an S-
Corporation
W-2 Income For Both Wage-Earners $ 60,000
W-2 From S-Corporation $ 4,000
Ordinary Income from S-Corporation $ 11,000
Total Adjusted Earned Income $ 75,000
Subtract $15,000 Itemized Deductions $ 15,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 46,800
Income Tax $ 6,269
Subtract Child Tax Credit $ 2,000
Taxes Owed By This Family $ 4,269
Tax Difference of S-Corp vs. Sole Proprietorship $ 1,955
Subtract 7.65% of $4,000 W-2 for FICA Tax Obligation $ 306
Subtract .8% for Federal Unemployment Tax Obligation $ 32
Subtract North Carolina Unemployment Tax Obligation $ 48
Net Annual Gain For This Family $ 1,569
A Side Note:
If the tax savings for this family was $1,569 per year for 30 years,
and they did not even invest the money, they would have $47,070
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$191,969
Example Two (Part I) Assumptions
- Two income-earners in household.
- Two children: tax credit applies
- Married Filing Joint tax status
- Side-business operated as a Sole Proprietor
- $15,000 in itemized deductions
W-2 Income For Both Wage-Earners $ 60,000
Net 1099 Income From Side Business (After Expenses) $ 30,000
Total Earned Income $ 90,000
Subtract One-Half Self-Employment Tax $ 2,120
Subtract $17,500 Itemized Deductions $ 17,500
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 57,180
Income Tax $ 7,821
Subtract Child Tax Credit $ 2,000
Add Self-Employment Tax $ 4,239
Total Tax Owed By This Family: $ 10,060
Example Two (Part Two) Assumptions
- The assumptions are the same as above, EXCEPT the
business has been incorporated and taxed as an S-
Corporation
W-2 Income For Both Wage-Earners $ 60,000
W-2 From S-Corporation $ 7,500
Ordinary Income from S-Corporation $ 22,500
Total Adjusted Earned Income $ 90,000
Subtract $17,500 Itemized Deductions $ 17,500
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $ 59,300
Income Tax $ 8,144
Subtract Child Tax Credit $ 2,000
Taxes Owed By This Family $ 6,144
Tax Difference of S-Corp vs. Sole Proprietorship $ 3,916
Subtract 7.65% of $20,000 W-2 for FICA Tax Obligation $ 574
Subtract .8% for Federal Unemployment Tax Obligation $ 56
Subtract North Carolina Unemployment Tax Obligation $ 90
Net Annual Gain For This Family $ 3,196
A Side Note:
If the tax savings for this family was $3,196 per year for 30 years,
and they did not even invest the money, they would have $95,880
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$391,017
Example Three (Part I) Assumptions
- Two income-earners in household.
- Two children: tax credit applies
- Married Filing Joint tax status
- Side-business operated as a Sole Proprietor
- $15,000 in itemized deductions
W-2 Income For Both Wage-Earners $60,000
Net 1099 Income From Side Business (After Expenses) $80,000
Total Earned Income $140,000
Subtract One-Half Self-Employment Tax $ 4,742
Subtract $20,000 Itemized Deductions $ 20,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $102,058
Income Tax $ 18,630
Subtract Child Tax Credit $ 700
Add Alternative Minimum Tax $ 274
Add Self-Employment Tax $ 9,484
Total Tax Owed By This Family: $ 27,688
Example Three (Part Two) Assumptions
- The assumptions are the same as above, EXCEPT the
business has been incorporated and taxed as an S-
Corporation
W-2 Income For Both Wage-Earners $60,000
W-2 From S-Corporation $20,000
Ordinary Income from S-Corporation $60,000
Total Adjusted Earned Income $140,000
Subtract $20,000 Itemized Deductions $ 20,000
Subtract $13,200 Standard Exemptions $ 13,200
Taxable Income $106,800
Income Tax $ 19,815
Subtract Child Tax Credit $ 500
Add Alternative Minimum Tax $ 322
Taxes Owed By This Family $ 19,637
Tax Difference of S-Corp vs. Sole Proprietorship $ 8,051
Subtract 7.65% of $20,000 W-2 for FICA Tax Obligation $ 1,530
Subtract .8% for Federal Unemployment Tax Obligation $ 32
Subtract North Carolina Unemployment Tax Obligation $ 214
Net Annual Gain For This Family $ 6,275
A Side Note:
If the tax savings for this family was $6,275 per year for 30 years,
and they did not even invest the money, they would have $188,250
more money for retirement.
If, however, they invested the savings each year into an investment
provided 8% interest each year for thirty years (a conservative
expected return), at the end of the thirty years they would have an
extra:
$767,720
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