02/22/2026
SELF-EMPLOYED: Should you go "S-Corp"?
Not necessarily, and HERE’S WHY:
We hear this frequently from prospective clients: “A guy I talked to said I should turn my business into an S-Corp to save a bunch on my taxes.”
More often than not, this simply isn't the case.
Before we dive into why this may not be the best move to make, here are 4 good reasons to consider converting your Sole Proprietorship into an S-Corporation:
-You have a retail business that carries an inventory
-You have ‘hourly’ or ‘salaried’ employees (wages and payroll)
-You want a business loan to fund business growth/expansion
-You want to open your business up to investors (offering shareholder stock)
If any of these circumstances apply to you, becoming an S-Corporation may be worth considering.
However:
While it’s true in certain cases that converting a Sole Proprietorship into an S-Corporation may yield additional tax savings, it also comes with an increase in costs - particularly for accounting, payroll, quarterly tax filings, annual corporate tax returns and in CA, the annual $800 Minimum Franchise Tax.
When a client explores this idea, the driving reason is usually to avoid paying the 15.3% Self-Employment tax incurred by Sole Proprietors. S-Corporations pay no employment taxes on profit distributions; only wages are subject to employment taxes (the 15.3%), and as long as you pay yourself a reasonable wage, the rest of your profits get taxed as ordinary income.
Sounds great!
But here’s the CAVEAT: if you’re the only employee (known as a shareholder-employee or owner-employee), then the reasonable wage is........ well........ whatever you’re making, right? Obviously your business can’t survive without you, because you’re a one person show!
Corporations with owner-employees are frequently audited by the IRS for low shareholder compensation because it is a primary method used to avoid employment taxes (the 15.3%). If an owner-employee of an S-Corporation takes minimal or no salary while withdrawing profit distributions, the IRS may reclassify those distributions as wages, resulting in back taxes, penalties, and interest.
So Chris, what do I do to save on my taxes each year?
This is EXACTLY why we’re here. The best way to minimize your tax liability as a Sole Proprietor is to have great bookkeeping. Our Tax Compliant Bookkeeping Service is specifically designed for the Self-Employed; it's much more affordable, keeps you tax compliant, financially informed and audit-proof, and ensures you never miss out on all of the credits and deductions you are entitled to, come tax time.
And remember, our service also includes preparing and filing your taxes each year.
Rates start at just $200.00 per month.
For more information about our “Tax Compliant Bookkeeping Service” for Self-Employed businesses, visit www.essentialtax.us or give us a call or text @ 760-668-6676.
Chris Compton, EA
Essential Tax and Bookkeeping
Based in Southern California.
Enrolled Agent- Admitted to Practice Before the IRS.
