Is S-Corp Taxation Worth It? A Practical Guide for Solopreneur Life Coaches at Different Income Levels

For a solopreneur life coach, structuring an LLC to be taxed as an S-Corp can lead to significant tax savings. However, this decision involves balancing potential savings against additional administrative and record-keeping burdens. Let's explore this process with four different income scenarios, considering hypothetical reasonable business deductions to estimate net income accurately. For a more general overview of understanding LLC Tax Classifications options, whether they be pass-through, S-Corp, or C-Corp, see this post.

Typical Monthly Business Deductions for Life Coaches

• Internet: $100

• Home Office Expenses: $200

• Cell Phone: $50

• Website Hosting and Maintenance: $50

• Marketing Expenses: $200

• Software Subscriptions: $100

Let's Assume Total Monthly Deductions: $700

Scenario 1: $2,000 Gross Monthly Income (this would be if you had 3 client sessions a week at about $150/session)

Net Income Calculation:

• Gross Income: $2,000

• Deductions: $700

• Net Income: $2,000 - $700 = $1,300
  

1. Pass-Through Taxation (Default LLC)

• Self-Employment Taxes: $1,300 * 15.3% = $199

• Annual Self-Employment Taxes: $199 * 12 = $2,388
  

1. S-Corp Taxation

• Reasonable Salary: $1,000

• Self-Employment Taxes on Salary: $1,000 * 15.3% = $153

• Annual Self-Employment Taxes on Salary: $153 * 12 = $1,836

• Dividends: $300

• Annual Dividends: $300 * 12 = $3,600

• Self-Employment Taxes on Dividends: $0
  

Annual Tax Savings of structuring your LLC to be taxed as an S-Corp: $2,388 - $1,836 = $552

Scenario 2: $5,000 Gross Monthly Income (this would be if you had 7-8 client sessions a week at about $150/session)

Net Income Calculation:

• Gross Income: $5,000

• Deductions: $700

• Net Income: $5,000 - $700 = $4,300
  

1. Pass-Through Taxation (Default LLC)

• Self-Employment Taxes: $4,300 * 15.3% = $659

• Annual Self-Employment Taxes: $659 * 12 = $7,908
  

1. S-Corp Taxation

• Reasonable Salary: $3,000

• Self-Employment Taxes on Salary: $3,000 * 15.3% = $459

• Annual Self-Employment Taxes on Salary: $459 * 12 = $5,508

• Dividends: $1,300

• Annual Dividends: $1,300 * 12 = $15,600

• Self-Employment Taxes on Dividends: $0
  

Annual Tax Savings of structuring your LLC to be taxed as an S-Corp: 

$7,908 - $5,508 = $2,400

Scenario 3: $10,000 Gross Monthly Income (this would be if you had 15 client sessions a week at about $150/session)

Net Income Calculation:

• Gross Income: $10,000

• Deductions: $700

• Net Income: $10,000 - $700 = $9,300
  

1. Pass-Through Taxation (Default LLC)

• Self-Employment Taxes: $9,300 * 15.3% = $1,423

• Annual Self-Employment Taxes: $1,423 * 12 = $17,076
  

1. S-Corp Taxation

• Reasonable Salary: $6,000

• Self-Employment Taxes on Salary: $6,000 * 15.3% = $918

• Annual Self-Employment Taxes on Salary: $918 * 12 = $11,016

• Dividends: $3,300

• Annual Dividends: $3,300 * 12 = $39,600

• Self-Employment Taxes on Dividends: $0
  

Annual Tax Savings of structuring your LLC to be taxed as an S-Corp: 

$17,076 - $11,016 = $6,060

Scenario 4: $20,000 Gross Monthly Income (this would be if you had 30 client sessions a week at about $150/session, or switched to higher ticket items/packages)

Net Income Calculation:

• Gross Income: $20,000

• Deductions: $700

• Net Income: $20,000 - $700 = $19,300
  

1. Pass-Through Taxation (Default LLC)

• Self-Employment Taxes: $19,300 * 15.3% = $2,950

• Annual Self-Employment Taxes: $2,950 * 12 = $35,400
  

1. S-Corp Taxation

• Reasonable Salary: $12,000

• Self-Employment Taxes on Salary: $12,000 * 15.3% = $1,836

• Annual Self-Employment Taxes on Salary: $1,836 * 12 = $22,032

• Dividends: $7,300

• Annual Dividends: $7,300 * 12 = $87,600

• Self-Employment Taxes on Dividends: $0
  

Annual Tax Savings of structuring your LLC to be taxed as an S-Corp: 

$35,400 - $22,032 = $13,368

Conclusion

For solopreneur life coaches, the tax savings from electing S-Corp taxation can be significant, especially as income levels increase. Here's a summary of the potential annual tax savings at different income levels:

• Scenario 1 ($2,000/month): $552

• Scenario 2 ($5,000/month): $2,400

• Scenario 3 ($10,000/month): $6,060

• Scenario 4 ($20,000/month): $13,368
  

While the potential savings are appealing, it's essential to consider the increased administrative responsibilities and costs. During your introductory strategy session with CMK Law Group, we can help you analyze your specific situation, income projections, and business goals to help you think these decisions through. Our goal is to ensure you make informed decisions that maximize your earnings and align with your business (and life!) aspirations. Feel free to set up a Small Business Strategy Session by clicking here.

Disclaimer: The information provided in this blog post is for educational and informational purposes only. It should not be construed as legal or financial advice. Viewing this content does not create an attorney-client relationship with CMK Law Group unless and until you enter into a signed engagement letter with our firm. For personalized advice tailored to your specific situation, please consult with an appropriate legal or financial professional before making any decisions.