S-Corp vs Single Member LLC… what should I do?

Hey all, I’ve been running a single-member LLC for a while now, but I’m wondering if it’s time to switch to an S-Corp. My CPA (who I only see when filing taxes) says the savings between the two aren’t significant, but everything I read online suggests otherwise.

This year, I’m profiting $900k—a big jump from last year’s $450k. I have two main questions:

  1. How much could I save by converting to an S-Corp? I’m in California and single.

  2. Is there any way to retroactively fix last year’s taxes due to what I think was some bad advice from my CPA? I know I should have been more proactive, but I usually just focus on running my business and don’t give much attention to taxes until the end of the year.

For reference, here’s my income from previous years:
2019 - $25k
2020 - $44k
2021 - $110k
2022 - $350k
2023 - $450k
2024 - $720k YTD

I don’t expect my income to drop below $450k next year, so any tips are appreciated. My family has never seen more than a $75k salary, so I’m kind of figuring this all out on my own. Thanks!

Is this your only income? Are you single? What state are you in? Is this something that could be done by hiring employees? What industry are you in?

Keaton said:
Is this your only income? Are you single? What state are you in? Is this something that could be done by hiring employees? What industry are you in?

Yes, this is my only income. I’m single and based in California. I work as an agent in the entertainment industry. No employees right now, but I hire contractors when needed.

@FiscalFanatic4
What’s a reasonable salary for a W2 employee doing your job?

Keaton said:
@FiscalFanatic4
What’s a reasonable salary for a W2 employee doing your job?

Hard to say, but I think I’d be worth around $250k if I were looking for a job. But my income depends on clients, so it could drop to the low six figures in some years.

@FiscalFanatic4
In that case, your CPA might be right. They’d know how your Qualified Business Income (QBI) deduction interacts with an S-Corp and might be seeing that switching wouldn’t save you much right now.

@Keaton
But at those profit levels, they might be making too much for the QBI deduction. You could still elect to be taxed as an S-Corp without having to re-incorporate.

Good advice in the comments, but another thing to consider—how much are you paying in tax prep fees? If you’re paying a decent amount, it’s a sign your CPA knows what they’re talking about, and switching to an S-Corp might not save you much. If you’re only paying a few hundred bucks, I’d be more concerned about the quality of advice you’re getting.

Your CPA might be right. It depends on the type of business you have because of the QBI deduction, but S-Corps are mainly designed to save you money on self-employment taxes. Since you’d max out your FICA taxes on your salary, the only real savings would be on the extra Medicare tax (1.8%). At best, you’d save around $9k, but the cost of filing an extra tax return, payroll, and other admin fees might eat up a lot of those savings.

Also, no, you can’t retroactively change your taxes to be an S-Corp if you’ve been filing as a Schedule C. The earliest you could switch is January 1, 2025.

@Kip
Thanks, that’s a relief to hear!

FiscalFanatic4 said:
@Kip
Thanks, that’s a relief to hear!

I’m not sure why someone said switching would cost you $100k. If you’re a qualified business on Schedule C, it’s basically the same thing as being an S-Corp. At your income level, switching would definitely make sense.

Let’s break it down: with $900k in profit, you’d pay about $44k in self-employment taxes as a Schedule C. If you switched to an S-Corp and paid yourself a $200k salary, that would be about $24k in payroll taxes. So you’d save around $20k in self-employment taxes. After accounting for extra admin costs ($3-4k for tax returns, $2,500 for payroll filings), you’d still be saving about $13k. Plus, there are other tax benefits like the pass-through entity (PTE) deduction in California that you can take advantage of as an S-Corp, but not as a single-member LLC.

You might want to ask your CPA about retirement plans as well.

You can file a late election to be taxed as an S-Corp starting January 1, 2024. Beyond the self-employment tax savings, being an S-Corp also allows you to take advantage of the California PTE (pass-through entity) tax deduction. This means your business can pay your state taxes, and you can deduct them on your federal return. Just a heads-up, you can’t elect PTE for 2024 because the deadline was June 15, but keep it in mind for 2025 (you’ll need to make a $1,000 payment by June 15, 2025, to qualify).

Once you consistently make over $100k, switching to an S-Corp starts to make sense. It also lowers your audit risk compared to a high-earning Schedule C.