This question comes up frequently. I discussed some of the general implications of when and why to become an S-corp in this post three months ago.
Today I want to specifically address the question of whether or not there’s a magical income level at which you should make the switch.
I’ve seen some accountants who say a sole proprietor should “always” become an S-corp when income gets above $20,000. In other cases I’ve seen $50,000 floated as the magic number.
I say it depends on your cash flow and whether or not you can afford to pay yourself a reasonable salary for the work you’re doing. So I’d agree $20,000 of net income from a proprietorship is probably the minimum amount where you’d even consider an S-corp. From there it would depend on if you could realistically pay yourself a salary.
I’m always baffled when I see accountants touting S-corp formation for sole proprietors because I wonder, how do these accountants get around the Joe the Window Washer tendencies of the typical proprietor?
How do these accountants convince the client, turning a profit of $20,000 a year, to deal with all the payroll crap and extra fees that comes with being an S-corp? In a majority of the cases I see, the tax savings aren’t enough to outweigh the headaches and extra fees, and the proprietor becomes angry and bitter about having an S-corp.
Questions to Ask Yourself
- Can you afford to pay yourself a reasonable salary?
- Is your current profit level going to increase, or at least stay the same?
- Are you okay with dealing with extra hassles and headaches associated with being a corporation?