My wife is a psychologist and a sole practitioner and registered as S corporation with payroll - is it better to be sole proprietor?
Answers | 2
An S Corp has both advantages and disadvantages compared to being a sole proprietor. From a self employment tax standpoint, by designating a 'reasonable' amount of her income as wages, which is subject to self employment taxes and the rest as a distribution, which is not subject to those same self employment taxes, so she would end up paying less than if she was a sole proprietor. As you know, there are some downsides to the S Corp. The downsides are that there generally higher costs for legal and tax preparation. Only you can tell if the payroll savings outweigh the additional costs.
Hi Jose, your wife can only be one or the other a sole proprietor or an S-Corp. In general a sole proprietorship is easier to setup and manage compared to an S-Corp. If you go this route just make sure you have some additional liability insurance as the sole proprietorship business entity provides little liability protection. As a sole proprietor your wife's income will be subject to self-employment taxes (also called payroll taxes) via her 1040, Schedule , and Schedule SE tax forms. If you are set up as an S-Corp you still have to pay payroll taxes but the S-Corp pays half through your payroll service. But since your wife is the owner of the company she is in effect still paying the tax. Please elaborate on your situation and I can try to help.