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Does switch from sole proprietor to S-corp make sense for me?

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  • Does switch from sole proprietor to S-corp make sense for me?

    I've been doing some reading on WCI and talking to colleagues and I'm trying to evaluate whether I should be switching from a sole proprietor to a single person S-corporation. I know the main benefit is saving 2.9% Medicare taxes and 0.9% Obamacare taxes above certain thresholds. I also know there is additional hassle/cost so I'm not sure how much extra that typically runs. I've heard 400k thrown around as a typical number where income has to be above for it to make sense but I wasn't sure what particular amount of savings we're generally talking about and wanted someone to review the numbers.

    State: Pennsylvania
    Occupation: physician paid exclusively 1099 (year 3 out of training)
    Tax filing status: MFJ
    Income (all 1099): ~620k past two years. Likely 700k+ this year (so use 700k for assumptions)
    How much to pay yourself: I read WCI blog post and they said keep it at 50% salary and 50% distribution (although if distribution should be lower, please comment on that)

    So, if math is correct...
    350k in distribution
    2.9% Medicare + additional 0.9% Obamacare = 3.8% savings
    Anticipated savings: 350,000*.038 = 13,300

    That seems like a decent amount of extra money to be saving annually on taxes alone. The number would go down if my distribution % decreases but it still seems that the savings would be substantial. In general, how much extra cost would it be for a CPA to do bookeeping/payroll/tax preparation if I went this route (compared to sole proprietor) as I'd likely outsource most/all of that work to them to save me on time. I'm guessing a few thousand a year in costs which still nets me 5-10k savings/year.

    Lastly, how much extra work does it really take if the CPA does "most/all" of the work. I'm really not looking for a lot of extra side projects.

    Appreciate any/all help with assumptions and opinions.

  • #2
    As sprit rider quoted from IRS on another thread: "But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes." (From

    Most physician 1099 income is for personal services. If the 1099 is all for your services a reasonable salary could be your entire income (no distribution). If you are getting a cut of owning something or income from other people's work that could be distributable. Now many people do what you suggest and the chances of being audited are slim. However, I would argue they may be at significant risk if audited.