DO YOUR HOMEWORK FIRST WHEN CONTEMPLATING MAKING CHANGES DUE TO THE NEW TAX LAW

2018 TAX LAW

Ran across a dear friend the other day and she said her accountant changed her business to an LLC and then filed for S Corporation status. I was perplexed by this since most people with very small businesses would probably do better under the new law with a sole proprietorship. The only real benefit from an "S Corporation" is that income not taken as salary (W-2) is qualified business income eligible for the 20% deduction and pays no FICA or Medicare tax. However if you consider the law requires a "reasonable salary" for the owner of a "S Corporation" the Qualified Business deduction has just disappeared. A sole proprietorship and a single owner LLC (which is treated by the IRS as a sole proprietorship) pays 15.3% on its net income for self employment tax (FICA and Medicare).

If you are getting this type of advice the only way to the make an intelligent decision is to run the numbers. Use pencil and paid or the computer. It is worth the effort. Otherwise by switching to an "S Corporation" you are creating more complicaitons in your taxes, another tax return has to be filed and you have to be wary of the balance between W-2 income and net income remaining after paying yourself. If the overall income of a married couple filing jointly is less than $315,000 ($157,000 for single, etc.) there is no issue regarding the Qualified Business Income Deduction of 20%.