Summary of What This Blog Covers
- Why sole proprietors often overpay in self-employment taxes.
- How an S Corp structure can reduce your tax burden.
- Steps to switch from sole prop to S Corp, including payroll and filings.
- Additional tax strategies like deductions, retirement planning, and FBAR compliance.
How the Right Business Structure Could Save You Thousands
Let’s get one thing straight right now. Being successful in business isn’t just about making more money. It’s about keeping more of it.
And if you’re running your business as a sole proprietor or even a single-member LLC without a strategic tax structure, there’s a good chance you’re paying more in taxes than necessary. Not because you made a mistake. But because no one told you what’s possible and what’s costing you.
At Insogna CPA, a trusted CPA firm in Austin, Texas, we help entrepreneurs rethink the way they earn, pay, and structure their income. Why? Because with just one key shift like electing S Corporation (S Corp) status, you could potentially save thousands in taxes every year.
Let’s dive into why so many business owners overpay, and what you can do today to change that story.
Why So Many Business Owners Overpay
If you’re a sole proprietor, you’re filing your business taxes as part of your personal return—IRS Form 1040, specifically on Schedule C. That’s straightforward. It’s how most people start.
But simple doesn’t always mean smart. And it rarely means tax-efficient.
Here’s why:
You Pay 15.3% Self-Employment Tax
That tax covers Social Security and Medicare contributions. Unlike a W-2 employee, whose employer picks up half of that tab, you’re the boss so you pay both the employer and employee portions.
- 4% Social Security
- 9% Medicare
- Total: 3%
Let’s put that in numbers.
If you earn $100,000 in net profit, you owe:
- $15,300 in self-employment tax
- Another ~$18,000 in federal income tax (depending on deductions and filing status)
That’s $33,000 gone before you touch a single dime.
And here’s what makes it worse. You’re taxed on 100% of your profit, whether you take it out of the business or not.
The Power of Choosing the Right Business Structure
What if you didn’t have to pay that full 15.3% on every dollar?
That’s where a properly structured S Corporation comes in.
Most business owners start as sole proprietors or single-member LLCs because they’re fast and cheap to set up. But the real tax savings come when you know how and when to pivot.
When your income grows, your structure should evolve too.
What Is an S Corporation?
An S Corporation isn’t a separate entity. It’s a tax election, a way for the IRS to treat your business differently for tax purposes.
You can start as an LLC, then file IRS Form 2553 to elect S Corp status.
And here’s the key benefit: income splitting.
With an S Corp, your business profits can be split between:
- A reasonable salary (subject to payroll tax)
- Distributions (not subject to self-employment tax)
That difference can dramatically reduce what you owe.
S Corp vs. Sole Proprietor: A Side-by-Side Look
Structure | Net Profit | Salary | Distributions | Self-Employment Tax | Tax Savings |
Sole Proprietor | $100,000 | $100,000 | $0 | $15,300 | $0 |
LLC with S Corp | $100,000 | $50,000 | $50,000 | $7,650 | $7,650 |
That’s more than $7,000 in savings every year, and the more you earn, the more you save.
Is an S Corporation Right for You?
Making the switch isn’t just about saving money. It’s about timing, structure, and your goals.
An S Corp Might Be Right If:
- Your business consistently earns $75,000 or more in net income
- You’re comfortable running (or outsourcing) payroll
- You’re ready to grow and want your structure to scale with you
- You want to reduce your tax bill without cutting corners
An S Corp Might Not Be Right If:
- You’re earning less than $50,000
- You need to retain all profits in the business (S Corps must distribute profits)
- You’re not ready to handle quarterly compliance (we can handle this for you, by the way)
Consulting with a licensed CPA or tax advisor in Austin will help you decide if this move makes sense based on your unique financial landscape.
Common Misconceptions About S Corps
Let’s bust a few myths.
“Isn’t it a hassle to become an S Corp?”
Not with the right team. Your Austin, TX accountant can file IRS Form 2553, help set up payroll, and handle quarterly and year-end filings.
“Won’t I lose flexibility?”
No, you gain control. You still run your business as you always have, but now you do it with a tax structure designed to help you grow.
“Can’t I just do this myself?”
Technically, yes. But DIYing your payroll filings, Form 1120-S, and quarterly tax payments is risky. One mistake with Form 941 or W-2 compliance could trigger penalties. A certified public accountant near you can help you avoid that.
How to Transition from Sole Prop to S Corp
We walk clients through this transition every week. Here’s how it works:
Step 1: Form an LLC (If You Haven’t Already)
You need an LLC to elect S Corp status. If you don’t have one, we’ll set it up for you, ensuring you’re compliant with state regulations.
Step 2: File IRS Form 2553
We submit your S Corp election on time, correctly. If you miss the deadline, you could lose out on a year’s worth of savings.
Step 3: Set Up Payroll
This includes:
- Determining a reasonable salary based on IRS guidelines
- Setting up payroll software or outsourcing to our firm
- Filing quarterly reports (Form 941)
- Issuing a W-2 to yourself at year-end
Step 4: File Your S Corp Return (Form 1120-S)
Along with your personal 1040, we file your S Corp tax return and ensure everything ties together smoothly.
Working with an experienced CPA in Austin, Texas or certified accountant near you makes the whole process seamless.
Extra Credit: Other Tax Strategies to Layer In
1. Maximize Your Deductions
Standard deductions include:
- Home office
- Business software
- Professional development
- Subscriptions
- Equipment (write off with Section 179)
- Health insurance (if self-employed)
- CPA fees (yes, your CPA office near you is deductible)
2. Open a Solo 401(k) or SEP IRA
You could:
- Contribute up to $66,000 per year (Solo 401k)
- Reduce your taxable income now
- Build tax-deferred retirement savings
Your small business CPA in Austin will help calculate the right contribution amounts and file associated forms.
3. Use a Health Savings Account (HSA)
If you have a high-deductible health plan, contribute to an HSA. It reduces your taxable income and allows tax-free withdrawals for medical expenses.
Special Situations: W-2 and 1099 Hybrid Income
What if you have both W-2 and 1099 income?
- Many professionals earn a salary during the day and consult or freelance at night
- In this case, your W-2 covers your payroll taxes
- But your 1099 income requires quarterly payments via IRS Form 1040-ES
You can still deduct business expenses related to your side hustle, but they need to be tracked separately. A seasoned tax preparer near you can make sure nothing gets missed.
Capital Gains, Investments, and Advanced Planning
Capital Gains Strategy:
- Short-term capital gains tax is applied to assets sold in under a year
- Long-term capital gains tax is applied to assets held longer than one year
- Rates for long-term gains are significantly lower, sometimes even 0% depending on income
Your chartered professional accountant or taxation accountant can help you optimize how and when to realize these gains, especially when paired with a growing business income.
International Considerations: FBAR Filing
Have more than $10,000 across foreign accounts at any point in the year? You’re required to file an FBAR (FinCEN Form 114).
This includes:
- Foreign bank accounts
- International PayPal balances
- Offshore crypto wallets
- Brokerage accounts
Noncompliance can lead to penalties of $10,000 or more, even if you didn’t owe taxes. If this applies to you, our enrolled agent or certified general accountant can guide you through FBAR filing requirements.
Working With the Right CPA
At Insogna CPA, our team includes:
- Licensed CPAs
- Certified public accountants
- Enrolled agents
- Tax professionals trained in capital gains, S Corp strategy, 1040 tax form compliance, and more
We offer:
- Entity review and structuring
- Full-service S Corp compliance
- Payroll setup and administration
- Quarterly estimated payment management
- Advanced tax planning for investments, retirement, and growth
If you’ve been typing “tax services near me” or “CPA firms near me” hoping to find a team that will actually take the time to get to know your business, this is where your search ends.
Final Takeaway: Pay Less. Keep More. Grow Smarter.
If your business is generating profit and especially if you’re passing $75,000 a year, it’s time to stop guessing and start structuring your income.
You don’t need to fight the IRS. You just need to work with the tax code instead of against it.
At Insogna CPA, we help business owners:
- Save thousands with proper S Corp setup
- File all required forms (from Form 2553 to Form 1120-S)
- Track deductions and plan retirement
- Navigate FBAR filings and capital gains tax
- Reduce tax stress, year-round
You work too hard to leave money on the table.
Let’s fix that. Schedule your consultation today.