I should probably start a new thread, but several helpful and relevant comments are here for reference. I've been seriously considering transitioning from an sole-proprietorship to an LLC electing to be taxed as an S-Corp. The math seems to be fairly straightforward: if your profits are significantly higher than "reasonable compensation" then you can save significantly on your self-employment tax as long as you are willing to follow proper accounting, payroll, and reporting procedures.
However, I live in Tennessee and it appears that the Franchise and Excise Tax really throws a wrench in things (as a sole proprietor, I've never been aware of these before and may be misinterpreting them). In fact if my assumptions are correct, @mrplutus calculator suggests that it is very difficult for me to come out ahead as an LLC+S-corp in TN at almost any level of profit. Which suggests that if I want to avoid my state's excise & franchise tax I should continue as a sole-proprietor (recognizing that I'm giving up the limited liability protections that an LLC provides).
Am I missing something?
Lets use these as our starting assumptions:
- I would be a single member S Corp
- net profits would be 140,000/year; research suggests that paying myself $60,000 per year is a reasonable salary for my activities
- 95% of sales are services/5% physical products (if this matters)
- 90% of sales are to businesses outside the state of TN (if this matters)
Would it be worthwhile for me to transition to an LLC+S Corp?
As you suspect, probably not enough given the hassle factor...
Very rough numbers... say you do an employer SEP or 401(k) 25% match, or $15K, on the $60K... that means you have $65K left over.
You pay, I think, 6.5% corporate income tax on that $65,000. That costs you about $4K.
Assume you also pay $2K in state and federal payroll taxes.
Say your S corporation tax return and payroll service costs you $1K a year.
So all in, to play the S corporation game, you're at close to $7K. And it could easily be $8K a year.
Your S corp saves you about $10K in payroll taxes as compared to operating as a sole proprietor or an LLC taxed as a sole proprietorship.
So you're "up" about $2K to $3K... (The $10K of S corp savings minus $7K to $8K of extra costs.)
But I bet you also lose some Section 199A tax savings via the S corporation. Typically you would. (For an S corporation, the 20 percent 199A deduction only looks at the $65K S corp profit while for a sole proprietorship, the 199A formula would "see" maybe $115K of Schedule C profits. Roughly.)
So that doesn't seem worth it to me.
BTW, if some local to Tennessee CPA chimes in, pay attention to their local knowledge. They'll be much better at guessing at payroll tax and tax prep fees than I will. (We have tennessee clients but not any S corporations operating just in the state.)
P.S. In a more small business friendly state, the S corporation that looks like
@Smokystache 's situation would avoid maybe $6K of payroll taxes and corporation income taxes. And now the thing is saving $8K to $9K a year... and that'll really add up over time.