I am thinking of changing my business from a Sole Proprietor to S-Corp but having second thoughts if I really should do this and hopefully the feedback from this forum will help me. My reason for staying as an Sole Proprietor is I think I will be exiting the business in the next 2-3 years and my business is slowing down. I have ample liability insurance and solely looking to change business format for tax savings especially the 2.9% Medicare tax that is applied to earnings over $110,100. I also believe there is 0.9% Medicare payroll tax on wages & self employment income above $250K. Can someone confirm this?
Here is some info you'll need about my situation.
I have been in business for the past 15 years as Sole Proprietor. The business is operated by myself with no other employees. The business sells test equipment for the scientific industry. I purchase the test equipment from the manufacturer and resell the product.
Total gross receipts $2.1M, gross income $530K. I have a DBP and Solo401K qualified plan that lets me contribute $223K and $49K respectively. After additional expenses the net profit is $240K.
S-Corp allows any profits flow through on a K1. Changing to a S-Corp requires me to get workman's comp and pay SUTA, FUTA which I don't need as a sole proprietor. Plus the corporate filings and extra tax filing for the S-Corp.
Since the business is just one person I'll need to assign a reasonable salary for a comparable position, not compared to business income. I think I'll contacting the Bureau of Labor Statistics for Massachusetts to help come up with a market salary for my position and then tack 10% on top of that.
My accountant said with S-Corp I'll have a low salary, probably 50-100K, so I will lose my large DBP contribution. To max the contribution for the DBP and Solo401K I need an income of $240K.
Having a salary of $100K and my DBP and Solo401K contribution will be much smaller so I am unable to defer the profits to qualified plan, thus paying more federal and state taxes today verses when I retire.
I expect to close down my business in the next 3 years. My business is more and more competitive, demand is shrinking and my sales and margins are falling every month. I would guess I'll the business would generate a profit of $350K in 2013, $250K in 2014 and $100K in 2015. When I do close my doors in 2015 I really don't expect to sell my business since the business is basically my hard work. There is no real estate or manufacturing equipment connected to the business. I rent business space, buy a widget from the manufacturer and then resell the widget to the end user.
Is it really worth changing to the S-Corp? I only see taxes going up so I feel changing to the S-Corp is the right decision and I probably should of done it 5 years ago. I just hate all the extra work changing all my accounts with vendors, merchant accounts, liability insurance policy and workers comp. Plus being an S-Corp is more prone to an audit which will only cost me more money for my accountant to represent me. Since the business is just one person I always need to worry about the IRS questioning what is reasonable salary. It seems the government is always trying to make earnings from the S-Corp also subject to SE tax which would effectively make no tax difference if I am a sole proprietary verses S-Corp if tax law ever changes.
Thanks for your thoughts and if you can give pros and cons it would be extremely helpful.
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