4 (1/2) Reasons Why You SHOULDN'T Use an S-Corp

S-Corps can be a great tool for business owners to lower their taxes, but they aren’t a one-size-fits-all solution for every business venture and every situation. Setting up your business as an S-Corp in the wrong situation can create more trouble than benefit. Here are 4 (½) reasons NOT to use an S-Corp! 

1.   You Have Multiple Owners and/or Multiple Businesses 

When you have multiple owners in an S-Corporation, two things will generally happen: First, things get messy trying to balance out which owner gets to expense what things through the business, and deductions are often forfeited to keep things ‘even.’  Second, for several reasons, wages to one or both owners are higher than what they truly need to be, meaning employment taxes are overpaid. To see the ideal setup for businesses with more than one owner, or if you own more than one S-Corp, check out this video on the right way to structure a multi-owner S Corp! 

2.   Your Annual Profit Is Less Than $20,000 

Don't file as an S-Corp if your business isn't clearing more than $20K annual profit yet. Open an LLC and wait until annual profits reach at least $20-$30K before electing to have that LLC file it as an S-Corp. With these lower annual profits, the self-employment tax savings is simply not large enough to justify the hassle and extra costs of setting up and maintaining an S-Corp. 

3.   Your profit is more than $500,000 

On the other hand, if you are generating significant taxable income, you’ll find that the benefits of your S-Corp will often diminish over $500,000 in annual profit ($250k for Single filers). At this point, ‘reasonable’ salaries are often so high that you aren’t saving much in employment tax, and you could also start to phase out of the QBI deduction, meaning more dollars taxed at a higher tax rate. To learn how to best structure your entities to deal with high annual profits, watch our helpful video below! 

     4.   Passive Income 

Passive income, such as rental real estate, isn't subject to self-employment taxes - so there is no need for an S-Corp. You can still have an LLC that owns the rental (for legal protection), but you don’t need it for taxes. There is no benefit to an S-Corp unless you have an operating business. Use a separate LLC to hold your passive activities. Learn more about separating the two in the video below.  

        4.5 BIG SALARY 

If you are taking a hefty salary from your S-Corp, you may not be getting much (if any) benefit from it. Not does the big salary reduce the employment tax savings benefits of having an S-Corp, but it also reduces your 20% QBI deduction, so more of your income is subject to income tax. Setting the correct ‘reasonable wage’ is critical to getting the most benefit from your S-Corp. Check out the video below to see how much tax you’re paying on every single dollar you pay yourself as ‘wages’! Hint: it’s a lot!