Mark Kohler explains why S-corps beat sole proprietorships for small-business owners. Converting to an S-corp cuts self-employment taxes because wages pay payroll tax but remaining profit doesn't, saving more than you lose from a smaller QBI deduction.
How do you guys balance taking a salary from an S corp with the QBI deduction for your clients? Now the QBI deduction is a qualified business income deduction. It was passed back with the Tax Cuts and Jobs act. The first round. Trump was in office and it was to help small businesses get an extra deduction off the business net income. That's the qbi. Well when you go to the S Corp your QBI deduction goes down because they're wanting to nail all of your active income in your LLC or your schedule C. It's going to get this cool deduction. Guess what comes with that? You're paying self employment tax out the rear. So the only people that are making this argument that the QBI is so important you shouldn't be an S corp are the same people that hate S Corps anyway. They're trying to find some stupid reason to make you take higher comp. They're not a fan of reasonable comp or pushing it down and they think S Corps don't work for some stupid reason. They've been around for 40, 50 years. They're great. And there's this undercurrent of just this weird group out there that thinks the S Corp is a bad idea and they're trying to find any reason to poo poo it. I do not get it. So the technical answer here is the QBI is a deduction. Self employment tax is assessed on every dollar. Every time I do a spreadsheet on this and I've taught class after class on this, by converting to an S corp your QBI deduction goes down but your savings on self employment tax goes up and it offsets it every time. The savings on self employment tax is better than the deduction on qbi.
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