Question 1

What is the difference between a sole proprietorship, LLC, and S-Corp?

Accepted Answer

A sole proprietorship is the simplest business structure with no formal registration required. An LLC (Limited Liability Company) provides personal liability protection but is taxed the same as a sole prop by default. An S-Corporation is a tax election that can reduce self-employment taxes by splitting income into salary and distributions.

Question 2

What is self-employment tax?

Accepted Answer

Self-employment tax is the Social Security and Medicare tax that self-employed individuals pay. It is 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net self-employment income. The Social Security portion caps at $168,600 in wages for 2025.

Question 3

What is a reasonable salary for an S-Corp?

Accepted Answer

The IRS requires S-Corp owners who provide services to pay themselves a 'reasonable salary' before taking distributions. This is typically based on what you would pay someone else to do your job. A common guideline is 50-70% of net business income, but it varies by industry and role.

Question 4

When should I elect S-Corp status?

Accepted Answer

S-Corp election typically makes sense when your net business income exceeds $50,000-$80,000 per year. The tax savings from reduced self-employment tax must outweigh the additional costs of payroll processing, tax preparation, and compliance. Consult a CPA for your specific situation.

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