Should I form an S Corp.?

Hi, Meg1756,

Great question. This analysis often comes down to a cost-benefit analysis.  S-Corps have many requirements, including the completion of an annual S-Corp return (1120-S) that does not generally apply to a sole proprietorship unless you make such an election.  This additional return could well increase your reporting requirements and completing business returns can be an expensive proposition. On the other hand, there are a lot of benefits with an S-Corp. TurboTax has provided this reference with some great information that can help you weigh alternatives.  It's also worth taking a peek at this page from the IRS.

Keep in mind you may have additional reporting requirements at the state level, likely including the need to register with your state's Secretary of State. If you query business registration along with your state name in a search bar, you should learn more about that.

Hope this helps.

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Regards,

Karen

TurboTax Expert

Hi There:

Assuming you are currently an LLC or self employed then within limits all net income is subject to individual self employment taxes.

S Corp is a legitimate vehicle to lower individual self employment taxes since since only officer W2 wages will be subject to self employment taxes, which is paid by the S Corp. The balance of income will be reported by shareholder by K-1, but it will be considered passive income which is not subject to self employment taxes. 

On the downside an S Corp has significant extra paperwork such as an 1120S Tax Return, employment tax returns and administration fees which will be required to keep the 1120 S a legal entity.

On your individual tax return. S Corp K1 earnings are considered passive income,  which if large enough could lead to a separate add on of- net investment tax of 3.8%. Also additional passive income could possibly lead to a lower retirement account deduction due to lower active income. (all is circumstance dependent)

Finally, The IRS requires all S Corp officers to take a salary equal to the fair market value of services rendered, so a W2 salary is not optional and should be fairly considered, and as mentioned, subject to employment taxes at the S Corp level.