As the founder of Brooklyn Fi (BKFI), an accounting firm that specializes in working with small business owners and freelancers in the creative and tech spaces, Shane Mason knows firsthand that finances and bookkeeping cause a lot of groans and eye rolls among the self-employed.
“People don’t get into business to do accounting,” Shane says. “They get into business because they love what they do.”
But while Shane (and any other accountant) understands any solopreneur’s desire to avoid the money stuff, doing so can lead to a lot of confusion and missed opportunities—especially when it comes to saving money on your tax bill.
Case in point? S Corps. This tax classification can save solopreneurs thousands in taxes. Yet, there are a lot of misconceptions that scare solos away from making the switch.
As the old saying goes, knowledge is power. So, we chatted with Shane to get the lowdown on S Corps, debunk some of the most common S Corp myths, and give you the education and encouragement you need to take control of your business finances (and your tax bill).
“One of the biggest myths about S Corps is that they’re an easy tax loophole,” Shane explains. “In reality, they come with responsibility, deadlines, and compliance.”
When you’re a sole proprietor or an LLC, you need to pay self-employment taxes on your entire taxable income. However, when you elect S Corp status, you split your income into two buckets: a reasonable salary and owner’s distributions.
You only pay self-employment taxes on your salary, which is where the major tax savings come into play. But, unfortunately, that makes it a little tempting to game the system.
“Some people think they can take all their income as distributions and not pay any taxes. That’s not how it works, and the IRS will eventually catch up,” Shane warns. “Just because someone on TikTok says you don’t have to pay yourself a salary doesn’t mean the IRS agrees.”
Put simply, an S Corp isn’t an under-the-table hack or a loophole. It’s a completely legitimate tax status recognized by the IRS. But the tax-saving advantages are built into the S Corp status, which means there’s no need to bend the rules.
TIP: Worried about cutting corners without meaning to? Lettuce will suggest a reasonable salary for you based on a variety of business factors, so you can be compliant and confident.
Say words like “tax classification” and “corporation,” and it’s easy to picture a business that’s larger or more complex than your business-of-one. But that doesn’t mean an S Corp isn’t a fit for you.
“I like to think the ‘S’ in S Corp stands for ‘simple,’ even though it doesn’t,” Shane says. “An S Corporation is great for businesses that are simple and will stay simple for a long time.”
So, don’t talk yourself out of an S Corp because you think it’s above your solo business. Regardless of whether you have a team of employees or are in business entirely for yourself, it can be an equally effective tax-saving strategy.
Admittedly, there’s a little bit of truth to this one. S Corps do have a little more complexity than an LLC or a sole proprietorship.
“You are both the employer and the employee in an S Corp, which means you have full control over your salary structure,” explains Shane. “But that also comes with responsibilities.” You’ll need to handle things like:
But being in business for yourself doesn’t mean you need to do all of this alone. Technology can play a big role here. “If you’re serious about your business, you have to think more like a business owner,” Shane continues. “Deadlines, payroll, bookkeeping…that’s where automation helps.”
An automated tax and accounting system like Lettuce can put all of these aspects of your S Corp on autopilot so you can benefit from the tax savings, without all of the stress.
So, yes, S Corps do introduce a little more administrative work, but it’s a worthy tradeoff for many solo business owners (especially high earners). As Shane says, “With great power comes great responsibility—and with complexity comes tax savings.”
There are plenty of things to love about an S Corp—but that doesn’t mean it’s the default right move for every business.
“If your business is making over $100K, that’s when it makes sense to start minimizing your tax bill,” explains Shane. Some other accountants and experts point to $50K or $60K as the magic number when it’s time to start thinking about S Corp status.
It’s not so much about the specific digits as it is about getting your feet under you in your business, starting to generate some revenue, and proving you can commit to thorough bookkeeping. That’s the time when it’s smart to start thinking about S Corp status.
TIP: Curious if an S Corp is the right move for you? Plug your numbers into Lettuce’s tax calculator to see how much you could save by making the switch.
There’s no shortage of myths and misconceptions surrounding S Corps, but here’s the truth: It can be one of the best ways to save on taxes and keep more of your hard-earned money.
The only catch? You need to manage a little added complexity with this tax status. That’s where Lettuce comes in.
From completing your S Corp election to categorizing your income and expenses to making your tax payments, Lettuce can handle all of the administrative stuff so you can focus on what matters most: your clients and your business. As Shane concludes, “Photographers should focus on taking great pictures, not figuring out payroll and tax compliance.”
Ready to spend less time on bookkeeping and more time on your billable work? Get started with Lettuce today.