Should You Become an S-Corp? (Real Talk)

S Corporations are one of the most glorified business decisions on social media but are they actually right for you?

In this episode, I break down what an S Corp really is, why everyone thinks they need one, and the truth behind the tax savings.

Because the reality is:

Becoming an S Corp isn’t a “level up”....it’s a strategic decision.

And if you make it too early, it can actually cost you more.

This episode shares the pros you of course hear everywhere, but also the compliances that you as the CEO must also know. 

Discover our offers and services at www.nacondramoran.com

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Transcript

SPEAKER_00 0:03

Welcome to the House of CEO podcast, where entrepreneurship meets intention. I'm your host, Nikondra Moran, here to share how building a business with purpose can create freedom and balance in life. Join me in inspiring guests as we explore the strategies, stories, and insights that help entrepreneurs align their work with their values so you can craft a business and life that truly reflect who you are. Let's begin the journey to success on your own terms. Hello, hello, and welcome to another episode of the House of CEO. This episode is just to go over should you be a S corporation? We are now in the beginning of the tax year, and even though the due date to be an S corporation has already passed, there are still opportunities for you to be an S-corp this year. And so one of the most common questions that I get from my clients and even like prospective clients, House of CEO community is should I be a S corporation? Now on paper, if you look on social media, TikTok, Instagram, S-Corp is very glorified. That is like the level up when you start your business, everyone wants to be a S-corporation. And sure, you do have lots of perks when you become a S-corp. You are able to bypass self-employment tax. That is the biggest pro of becoming a S-corporation. Now, to take it all the way back, if you are operating as a single member LLC, as a sole proprietor that fouls on a Schedule C, you know that not only are you being taxed regular income tax, but you are also being taxed an additional 15.3% self-employment tax. And that is based on the profit from your business. So for all of the individuals who become self-employed, they're like, oh my gosh, I owe so much more in taxes. That was one of the biggest questions that I got when I was working at the IRS. And that's because when you are self-employed, you are getting all of your money in your pocket. So they're not taking out any federal taxes, they're not taking out any state taxes. Everything is coming into your pocket. And this is another reason why pricing is so important because you cannot price, you can't undercharge. And I talk about that a lot inside of the House of CEO as well, because you have to account for all of the things that you are not paying yet. You are getting everything in your pocket and you're responsible to pay not only the additional self-employment tax, but the regular income tax as well. They're not taking out any taxes. And now, when you become a S corporation, that additional 15.3% self-employment tax that you would pay as a sole proprietor, you no longer have to pay that tax. So that's like the biggest pro to becoming a S corporation. It makes it a very attractive business structure to become. But along with becoming a S corporation, are compliances that every individual business owner needs to be aware of. You also have to make sure that you're ready to take on these responsibilities and compliances because I've seen historically that some people do great as an S-corp and some people don't like it. Now, if you are starting your business and you like that freedom and flexibility and you like to pay yourself when you want to pay yourself and so forth, when you become a S corporation, you are now required to pay yourself on payroll. So you have to set up some type of payroll system. For me, all of my clients use Gusto, and that's an annual monthly payroll subscription that you maintain once you become a S corporation. So that's an added compliance cost that you have to think about when you decide to become a S corporation. You now have to pay yourself a reasonable salary. So even though you are bypassing self-employment tax, the IRS still wants a little bit of their cut by way of payroll tax through your W-2. So being an S corporation and bypassing self-employment tax is just the first part of being a S-corp. The second piece is also paying yourself a reasonable salary. So along with that is making sure that you have payroll set up, making sure that you're paying yourself a reasonable salary, and making sure that you are filing all applicable payroll reports to the IRS and to the state. So that's why it's so important to have a really good payroll system. Gusto is a good one, but there's many other ones you may have heard of, such as QuickBooks payroll, ADP payroll. There's also PEO systems like JustWorks, TryNet, and there's others. So the first piece is are you ready to pay yourself on payroll? Are you ready for that extra compliance cost? Number two, you are going to have an earlier due date. Right now, if you are filing as a sole proprietor, the due date is generally April 15th and your Schedule C is an attachment to your personal income tax return. But if you are filing as a S corporation, your due date is now a month earlier. It's March 15th. So you are responsible for making sure that your tax return is either filed by March 15th or you file an extension. So that extra due date also comes with a extra tax return. So that could be an extra added compliance cost because your accountant or whoever you work with may charge you an additional fee now that you're an S corporation. So that's an additional cost that you have to think about. So whoever you're working with, when you're really starting to decide should I be an S corporation, I really like to include all of the compliance costs to my clients. I like them to see, all right, if I become an S Corp, these are the additional payroll costs I'm gonna have to think about. These are the additional accounting fees that I'm going to have to think about because now I'm not just filing a 1040. Now I'm filing an extra tax return, which is an 1120S. So really just being very transparent is very important that you kind of seek that so you know what the average or estimated cost would be. All right. So I've already talked about the additional payroll that you'll have to set up, the additional tax return. And then you really want to have an actual accounting software. So if you are operating as a Schedule C, you likely could be operating on a spreadsheet. You could also be operating just you could be using one of my spreadsheets. But if you are operating as an S-corp, you really need to move to an accounting software. And the reason why is because S-corporations are required to keep balance sheets. They're also required to track shareholder bases, which is the amounts that you bring into the business and the amounts that you take out by way of distribution. So all of those things are best suited to be tracked on a balance sheet. So having an accounting software is very important because it's able to track that for you. But then that also ties into why the bookkeeping piece is so important and also making sure that you're practicing good bookkeeping habits as well, in order for you to keep an accurate balance sheet for your S Corporation tax return. So when you are thinking, should you be an S-corp, these are some of the things that you are also going to have to wrap your head around. So when I do S-corporation elections, I always like to have calls with my clients and walk them through all of the compliances. Just like there are CEO mindsets when you are trying to hire someone or increase your team or to change your services or to market or investing in that business coach, there's a mindset shift that you're also going to have to have when you shift to become a S corporation. You're going to have to wrap your head around all of the different compliances. And you, not the accountant, not the bookkeeper, you as the CEO, it will become your responsibility to make sure that you understand all of the compliances, due dates, and what's required of you so that you can actively stay in compliance for your S-corp status. So these are just a few things to think about when you are asking, Do I really want to be an S Corporation? Yes, there are wonderful benefits to becoming a S Corp, but you are going to have to understand that there will be some updates that you will also have to wrap your head around once you become one: the payroll piece, the bookkeeping piece, and also the extra tax return piece. There is more, of course, but those are some of the main things to think about when you are wanting to shift to become a S corporation. Last piece that I will leave you with is whoever does your S corporation election, they may charge you a fee in order to do one. So S corporations, uh, the due date is March 15th following the close of the tax year. So for example, this year, if you want to be a S corporation for 2025, the due date to be that is March 15th timely. Now, even if it's past March 15th, you can still file to be a S corporation, but that is considered a late election. So if you decide to self-prepare or if you hire someone to self-prepare, that's also an additional cost that you also have to be considerate of as well. You will either file a timely election if it's by the March 15th due date, or you would file a late election. And once you submit it, it could take months for you to get it back. So you do want to go ahead and start acting as a S corporation, going ahead and setting up your payroll and doing everything that you should be doing as if you have an acceptance letter, because of course the IRS is very backlogged, so it may take a while for you to get something back from them. So those are four things to think about, not necessarily cons, but awareness is key, right? And awareness allows you to make really good decisions that you are able to think about the full picture in order for you to make the best decision. So, do you really want to be an S-Corp? It is a great business structure to be in. Considerations, payroll, making sure you have a good accounting software, making sure you are aware of the extra tax return you now have to file, and then the actual setup of the S Corporation election. Those are just a few things to think about as you are making your decision. I hope that it was helpful. If you want more information, go to my website. I have resources around becoming a S Corporation. So thank you for listening. I will see you in the next podcast episode. Thank you for tuning in to the House of CEO podcast. If you enjoyed today's episode, don't forget to subscribe, leave a review, and share it with someone who would benefit from these insights. For more updates and resources, follow me on social media or visit nekondramoran.com. Remember, success is yours to define. Keep building a business and life that reflects who you truly are. Until next time, take care.