If you are a high earner AND not in the out-of-favor specified service trade or business group, you may want to consider operating as an S corporation to qualify for the new Section 199A 20 percent tax deduction. If you currently file as a Schedule C taxpayer because you receive 1099s, operate a single member LLC, or do business as a proprietor, you can qualify for the new 20 percent tax break allowed by tax code Section 199A if your business and taxable income are just right.
What Creates the Problem?
To qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income equal to or less than $157,500 (single) or $315,000 (married). If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property.
S Corporation to the Rescue
First, to turn your sole proprietorship into an S corporation, you need to either incorporate the proprietorship or turn the proprietorship into a single-member LLC. Now that you have the S corporation in place, you use that S corporation to pay yourself a reasonable salary, which you base on your facts and circumstances. With this, you create two benefits that did not exist before your creation of the S corporation:
1. A savings on your self-employment taxes
2. A Section 199A deduction
To know how this would work for you, you need to run the numbers. Make sure you get the numbers right. Spend money to have your tax professional help you, because you likely have more to consider in this calculation than just the payroll taxes and 20 percent deduction.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX are generally unaware of even the basic entity choices available to them and may find themselves overpaying in taxes.