Sole Proprietor Versus S Corp Calculation

[klw085]

Now that tax season is largely over, I've been thinking over my taxes and have just a general question I was hoping people could help weigh in on.

I am a professional and a couple of years ago started my own practice.  To keep things simple I started out as a sole proprietor.  I did some research into S corps at the time and when I looked into my actual situation, it just looked like too much of an expense and hassle to start it as an S-corp.  I currently have no issues filing my own taxes etc.  I split our business with my wife as a qualified joint venture and simply file 2 schedule Cs on our tax return in order to take advantage of a defined benefit plan / pension for the both of us.

However, our annual revenue is now around 1.5 million and it looks like that will be fairly stable.  Based on several calculators, it seems like I would save a significant amount in medicare / payroll taxes if I made the switch to an S-corp though I just don't see how.  When I add in the expense of lawyers, accountants, as well as the fact that I would have to pay myself at least 500k a year as a reasonable salary and would I now have to continue to pay my wife, as well as continue to max out the pension plan, would I really be saving enough in taxes to make such a switch?

[Carl]

You really need to seek the knowledge of a tax professional in your area that is well versed in S-Corps and the such. Especially if your state taxes personal income. What works for you, may not work for a colleague in the same business, as it depends on specifics. Talking with a professional will allow you to make educated decisions based on the specifics of your situation.

Keep in mind that with an S-Corp there can be a fair amount of never-ending paperwork associated with that organizational structure. It's not all that much really. But it's never ending. Missing a deadline can be costly too.

[tagteam]

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@klw085 wrote:

I am a professional and a couple of years ago started my own practice. 

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What type of practice and is your wife also a (licensed) practitioner?

I realize this is not specifically related to your primary inquiry, but many (and most, if not all) states prohibit individuals who are not licensed to practice particular disciplines from establishing an ownership interest in a sole proprietorship or other entity. Two prime examples are attorneys and real estate brokers. 

Regardless, you absolutely need an in-person consultation with a local tax professional and legal counsel.