C corp vs S Corp for avoiding pass-through income on personal taxes

Hey all, I'm trying to figure out the best approach for my business structure. I want to become a W2 employee of my own company and eliminate any pass-through income from showing up on my personal tax return. I understand the whole double taxation situation that comes with this. My main question is whether I should establish a C Corporation or set up an S Corporation but elect to be taxed as a corporation. Does either option have significant advantages over the other in terms of simplicity or tax benefits? Are there specific filing requirements that make one more straightforward than the other? I'm primarily focused on keeping business income separate from my personal taxes, but want to make sure I'm not missing something important in my decision-making process.

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20 comments

Zoe Dimitriou

•8M

A C Corporation is probably what you want if your main goal is avoiding pass-through taxation. The fundamental difference is exactly what you're looking for - C Corps are separate taxable entities while S Corps are pass-through entities by their very nature. An S Corporation with an election to be taxed as a corporation is actually a bit confusing - S Corps are specifically defined as pass-through entities, so you'd actually be forming a corporation and NOT electing S Corp status if you want to avoid pass-through taxation. The default taxation for corporations is as a C Corp. With a C Corp, the company pays its own taxes on profits, and then you'd only be taxed personally on your W2 salary and any dividends. You'd need to pay yourself a reasonable salary based on your role and industry standards to avoid IRS scrutiny.

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Zoe Dimitriou

•8M

Yes, double taxation is the main drawback of a C Corporation. The corporation pays taxes on its profits, and then if you distribute those profits as dividends, you'd pay personal income tax on those dividends. This is why it's important to balance salary and other compensation strategies. There isn't really a way to have an S Corporation without pass-through taxation - that's the defining characteristic of an S Corp. The whole point of an S Corp is to provide limited liability while avoiding corporate-level taxation. If you want to avoid pass-through, a C Corp is the cleaner approach.

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Jamal Anderson

•8M

I was in a similar situation last year and ended up going with a C Corp structure after trying to navigate the whole pass-through mess with my previous LLC. I found this tool called https://taxr.ai that helped me analyze the specific tax implications for both options based on my projected income and expenses. It was pretty eye-opening to see the actual numbers side by side. The biggest advantage I found with the C Corp route was the ability to keep business profits separate from my personal income. I pay myself a reasonable salary and the company retains the rest for reinvestment. The tool helped me find the optimal salary level that minimized my overall tax burden while keeping things compliant.

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Jamal Anderson

•8M

The analysis was surprisingly accurate - within about 5% of what actually happened when I filed. The key is entering realistic projections for your business income and expenses. You do need to provide financial details, but it's all handled securely - nothing gets stored permanently according to their privacy policy. I was comfortable with the level of information required, and you can always use slightly adjusted numbers if you're concerned but still want a meaningful analysis.

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Liam McGuire

•8M

Just wanted to follow up about that taxr.ai site mentioned above. I was skeptical at first (as you could probably tell from my question), but I decided to try it out since I was debating between entity types for my consulting business. The tax comparison feature actually helped me realize that in my specific situation, the C Corp would save me about $8,400 annually compared to other options. What really surprised me was how it flagged potential audit triggers I hadn't considered with my planned deduction strategy. Definitely changed my approach. The entity selection tool asks the right questions - way more comprehensive than the generic advice my buddy was giving me. Wish I'd found this before spending hours on generic Google searches that just confused me more.

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Amara Eze

•8M

If you're trying to get specific guidance on this entity selection, good luck getting the IRS on the phone. I spent literally 4 hours on hold trying to get clarification about the exact reporting requirements for my situation. Finally found https://claimyr.com which got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that for my situation (similar to yours), the C Corp was cleaner for avoiding pass-through income. But she also pointed out some specific filing requirements I hadn't considered that would have been a nightmare to fix later. Apparently there are some specific reporting requirements when you're both the owner and employee.

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Amara Eze

•8M

It's basically an automated system that navigates the IRS phone tree and waits on hold for you. When they actually reach a human agent, you get a call to connect with them. No more sitting on hold for hours. They use some kind of proprietary technology that keeps your place in line without you having to be on the phone. I was skeptical too, but when I got the call back with an actual IRS agent on the line after doing other things with my morning, I was sold. It's especially valuable if you need specific guidance on something like entity selection where generic online advice doesn't cut it.

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NeonNomad

•8M

I owe everyone here an apology about my comment on Claimyr. After calling BS on it, I was still desperate enough to try it because I had some urgent questions about my entity conversion that required IRS clarification. Not only did it work exactly as described, but the agent I spoke with gave me specific guidance about the C Corp election timing that saved me from making a costly mistake. I'm not usually one to admit when I'm wrong, but in this case I'm glad I gave it a shot despite my skepticism. Just having a record of actually speaking with an IRS representative about my specific situation gives me peace of mind for if I ever get audited. The agent even gave me her ID number for my records.

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Fatima Al-Hashemi

•8M

One thing to consider with the C Corp option is the possibility of keeping more money in the business at lower corporate tax rates, then taking it out strategically. My accountant helped me set up a medical reimbursement plan through my C Corp that lets me deduct health expenses that wouldn't be deductible personally. Also, don't forget about possible fringe benefits like disability insurance that C Corps can deduct. The key is having a good tax strategy beyond just the entity selection.

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Fatima Al-Hashemi

•8M

They're called QSEHRAs (Qualified Small Employer Health Reimbursement Arrangements) or ICHRAs (Individual Coverage Health Reimbursement Arrangements). Basically, the corporation reimburses you for medical expenses including premiums, and those reimbursements are tax-free to you but tax-deductible for the business. Setting them up requires proper documentation and compliance with certain rules, but it's not overly complicated. There are annual limits to how much can be reimbursed, but it's generally enough to cover significant medical expenses. My accountant handled the paperwork, and now I just submit receipts for reimbursement through a simple system.

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Leeann Blackstein

•8d

Great discussion here! I'm actually in the middle of making this exact decision for my consulting business. From what I'm reading, it sounds like C Corp is definitely the way to go for avoiding pass-through income, but I'm curious about one practical aspect - how do you all handle the "reasonable salary" requirement? The IRS wants you to pay yourself a reasonable W-2 salary, but I'm not sure how to benchmark what's "reasonable" for my industry. Do you just look at comparable roles at other companies? And if I set my salary too low initially, can I adjust it mid-year without raising red flags? I want to optimize the split between salary and retained earnings, but obviously don't want to invite an audit. Also, for those who went the C Corp route - did you notice any issues with business banking or getting loans? Some people have told me that C Corps can be more complicated for small business financing.

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Ethan Clark

•1d

For reasonable salary benchmarking, I use a combination of Bureau of Labor Statistics data for my role/location and industry salary surveys. The key is documenting your research - save screenshots of comparable positions and salary ranges so you can justify your decision if questioned. You can definitely adjust your salary mid-year, but it's cleaner to do it at the beginning of a quarter and document the business reason (like taking on new responsibilities or market rate changes). The IRS generally looks at the total compensation over the year, not monthly fluctuations. Regarding business banking and loans - I haven't had any issues. If anything, having a C Corp structure made me look more established to lenders. The key is keeping clean books and having proper corporate formalities in place. Some banks actually prefer working with C Corps because the liability structure is clearer.

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