Your Business Structure is Your First Tax Strategy: S-Corp vs. C-Corp vs. Sole Prop

For high-income self-employed professionals, the very first decision on your tax journey is how your business is structured. This foundational choice profoundly affects your income taxation, available tax deductions, and even your retirement planning.

Let's break down the main options:

•Sole Proprietorship or Single-Member LLC:

◦Simplicity is its main appeal.

◦However, for high earners (over $250k profit), it's "not the most tax-efficient".

◦All net business income is subject to full self-employment (payroll) taxes. This means paying 15.3% self-employment tax on nearly all your profit, in addition to income tax.

◦While your entire net profit counts as "compensation" for retirement plan contributions, this benefit often doesn't outweigh the extra payroll tax for very high incomes.

•S Corporations (S-corps):

◦Do not pay tax at the corporate level; profits (or losses) flow directly to your individual return.

◦A significant advantage is that net profits are not subject to self-employment tax. Only the salary you pay yourself as an owner-employee is subject to Social Security and Medicare taxes. This can lead to substantial savings for high earners, as distributions beyond a reasonable W-2 salary are not hit with payroll taxes.

◦S-corp owners must pay themselves a reasonable wage.

◦Qualifying pass-through income may also be eligible for the 20% Qualified Business Income (QBI) deduction.

◦Many high earners choose an S-corp or LLC taxed as an S-corp as a baseline strategy for tax savings.

•C Corporations (C-corps):

◦A separately taxed entity, paying a flat 21% corporate tax rate on its profits.

◦The main disadvantage is potential double taxation: corporate profits are taxed at 21%, and then again if distributed to you as dividends.

◦Despite double taxation, C-corps can be appealing in specific scenarios, such as when you do not need to withdraw all profits, allowing you to reinvest or save earnings at the lower 21% corporate tax rate.

◦C-corporations offer unique tax advantages for fringe benefits and deductions. Many employee benefits can be fully deducted by the company and excluded from the owner’s taxable income. This is a key reason some high-income owners consider this status.

Choosing the right structure is crucial and depends on your specific needs, income stability, and long-term goals. It’s not just about this year’s tax rate, but also affects how you deduct health insurance, qualify for the QBI deduction, and fund your retirement. Consulting a qualified tax advisor is crucial to model out scenarios and ensure you make the most informed decision.