I think I fucked up...

transistor

transistor

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Sep 30, 2007
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So, I recently coverted my sole proprietorship into an s-corp. I did this because the CPA that did my estimated taxes told me that if I ran as an s-corp, I could pay myself a small wage and pay the rest as dividends, which wouldn't be subject to the 15% self-employment tax. He also claimed I could deduct my college tuition from the business. I was sold.

He wouldn't answer my emails, so I decided to find a new CPA. Today, I visited with her and she claimed that the IRS would rape me if I paid myself more in dividends than wages. Even a 50-50 split would be asking for it. She said it would be pretty much impossible to deduct tuition. And the effective tax rates for a sole proprietor and a single person s-corp are basically identical. She talked so fast, I wasn't completely sure how she figured that, but she sounded like she knew what she was talking about.

She said the only reason it would make sense for me to run as an s-corp is for the protection. Since I don't really need that, I think I'm going to convert back into a sole proprietorship. It seems infinitely easier to run. My head started spinning when she listed off all the forms and payments I would have to deal with every quarter. I wish I hadn't spent all this money and time setting up the s-corp.
 


Unarmed Gunman said:
LLC FTW
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LLC isn't a tax status. Even with an LLC, as a single member it can be treated tax wise just like a sole proprietorship would be. So it would be no difference.


But to the OP, yes your 2nd CPA was right. If audited, the IRS can be very picky about how much you pay yourself in dividends compared to wages.
 
majorbta said:
LLC isn't a tax status. Even with an LLC, as a single member it can be treated tax wise just like a sole proprietorship would be. So it would be no difference.
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That's kinda the point. Legal protection without nearly as much ridiculous paperwork.

LLC's are not officially recognized by the IRS so they are taxed as either a sole proprietorship (disregarded entity), or and S-Corp. As far as the tax implications - not my strong suit. I do know that writing off tuition should be allowed but isn't. As far as dividend's and all that I think your 2nd CPA is closer to the truth than the 1st one.
 
Get a third opinion. Why would you trust this new opinion as you did the old opinion? Contact your local small business association. I run went with an S-Corp 8 years ago and would do the same again today.
 
Volume10 said:
Get a third opinion. Why would you trust this new opinion as you did the old opinion? Contact your local small business association. I run went with an S-Corp 8 years ago and would do the same again today.
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Do you have employees? Are you saving money on taxes by using an s-corp?
 
If you have more than 3 employees then go with S-Corp. If you are a sole proprietor then go with an LLC.
 
Recently went through all this and in my case a LLC was best for me. I run as a sole proprietorship for all intents and purposes.

This gave me some legal protection, and the flexibility to do whatever I wanted with the money that comes in and goes out.

In simple terms - the business money and my money are one and the same. If the business gets sued and/or goes bankrupt I don't have to personally.

Unless you have employees that are on the payroll, are doing HUGE amounts of money, etc... it just didn't make sense to do a s-corp from any angle we looked at it.
 
You need to incorporate. Then you can set yourself a budget of how much you get paid every week or so. That will get taxed normally. The rest will not get taxed unless you use it for purposes that do not pertain to your business. That sounds like the best option for you. Whoever told you to convert to s-corp is an idiot.
 
It's all about reasonable compensation with an S-Corp. As long as you can justify your salary to the IRS they can GTFO.

That "15% self-employment tax" you mentioned is the 15-ish% you will be paying into FICA and Medicare on all of your money if you go LLC or sole proprietor.

Just skimmed the below link and it appears to explain all of this in decent detail:
Reasonable Compensation for S Corporation Owners. Wages versus distributions.

Print that (or something similar) and go slap that last bitch in the face with it and tell her to go back to work for H&R Block.

"I wish I hadn't spent all this money and time setting up the s-corp."
Sounds like he raped you. S-Corp prep shouldn't run more than $400 on the high end.
 
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