In 2018, Jill started a dentistry practice. She is the sole owner.
After paying all her business’s expenses, Jill’s practice turned a profit of $100,000. Jill has to pay income taxes on the $100,000 profit on her Form 1040 tax return. If Jill’s income tax rate was 15%, she would have to pay $15,000 in income taxes.
If Jill’s business was a sole proprietorship, she would also have to pay self-employment taxes of 15.3% on the $100,000 profit, or $15,300. Jill’s total tax bill as a sole proprietor would be $15,000 of income taxes + $15,300 in self-employment taxes = $30,300.
If Jill’s business were an S corporation, she wouldn’t have to pay ANY self-employment taxes on the $100,000 profit. Jill would only have to pay income taxes on the $100,000, or $15,000.
Sounds like no contest, correct? S corporation wins? Why would you willingly choose to pay $30,300 in income and self-employment taxes if your business is a sole proprietorship vs. only $15,000 in income taxes if your business is an S corporation?
There must be a catch, right? Can S corporations really pay no self-employment taxes?