Considering S Corp setup for consulting business - Questions about business expenses and taxable income

I've been weighing my options for starting my own consulting business, and I'm leaning towards setting up an LLC that elects S Corp status right from the beginning for the tax advantages. I'd be the only owner/employee, primarily doing remote consulting work with occasional travel to client sites. The more research I do, the more I think I understand the main points: * Self-employment taxes - I know I'm on the hook for the full 15.3% FICA taxes as both employer and employee, but I can deduct half of that from my income tax burden * S Corp and Wages - I understand that with an S Corp structure, the salary I pay myself counts as a business expense (as long as it's reasonable compensation) But I still have questions about how business expenses work with the S Corp setup and how they affect my overall taxable income. What are the differences in how business expenses are handled compared to a sole proprietorship? And how exactly does the S Corp structure change my tax situation when it comes to claiming these expenses?

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18 comments

Emma Davis

•8M

You're on the right track with your understanding of S Corps. The key advantage is that only your W-2 wages are subject to FICA taxes (Social Security and Medicare), while distributions aren't. This can create significant savings compared to a sole proprietorship where all profits are subject to self-employment tax. For business expenses, they work similarly in both structures - legitimate business expenses reduce the company's taxable income. The difference is in how that flows to you personally. In a sole proprietorship, all business income/expenses flow directly to your personal return via Schedule C. With an S Corp, the business files its own return (Form 1120-S), and then passes net income to your personal return via Schedule K-1. The biggest thing to watch for is reasonable compensation. The IRS expects you to pay yourself a market-rate salary before taking distributions. If you try to minimize your salary too much to avoid FICA taxes, you're inviting scrutiny.

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Emma Davis

•8M

The additional costs vary depending on your situation, but expect to spend around $1,000-$2,000 annually for tax preparation (S Corp returns are more complex) and potentially another $500-$1,500 for payroll services if you outsource that. You can technically run payroll at whatever frequency works for your business - monthly, quarterly, or even annually in some cases. Many S Corp owners do quarterly or monthly payroll. Just make sure you're consistent and making the appropriate tax deposits on schedule. The key is establishing a reasonable salary compared to your distributions over the course of the year.

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Malik Robinson

•8M

I went through this exact decision last year when starting my consulting business. After struggling to figure out the whole reasonable compensation thing and trying to calculate potential savings, I found this tool called taxr.ai (https://taxr.ai) that helped me analyze whether the S Corp election made sense for my specific situation. It ran the numbers for both scenarios and showed me the break-even point where the S Corp savings would outweigh the extra costs. For me, it made sense because I was projecting around $140k in profit, but it might not be worth it if you're expecting less than $80k or so because of the additional compliance costs.

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Malik Robinson

•8M

I found the extra administration time was worth it because I saved about $7,500 in taxes my first year. I use QuickBooks and a payroll service that handles most of the heavy lifting, so it's not too bad once it's set up. The tool actually did account for state-specific factors. I'm in California which has that extra $800 minimum franchise tax for S Corps, and it included that in the calculation. It also considered my particular industry standards for reasonable compensation, which was super helpful since that's the trickiest part of the S Corp strategy.

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Ravi Choudhury

•8M

I was initially skeptical about those online S Corp calculators, but I decided to check out taxr.ai after seeing it mentioned here. I'm genuinely impressed with the analysis it provided. I'd been leaning toward staying as a sole proprietor to avoid the extra complexity, but after seeing the actual numbers for my situation, the S Corp election makes way more sense than I thought. What was most helpful was seeing the year-by-year projection as my business grows, showing exactly when the S Corp election starts paying off. The reasonable compensation guidelines were also much clearer than what my accountant explained. Wish I'd found this tool before spending hours researching everything myself!

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Freya Andersen

•8M

If you're struggling to get answers from the IRS about S Corp requirements or have questions about filing Form 2553 (the S Corp election), I'd recommend trying Claimyr (https://claimyr.com). I spent weeks trying to get someone at the IRS on the phone to confirm my S Corp election went through, but kept getting disconnected after hours on hold. Claimyr got me connected to an IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Totally changed my perspective on dealing with the IRS. The agent was able to confirm my S election status and answer some specific questions about my situation.

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Freya Andersen

•8M

It's not a secret line or anything like that. They basically use technology to handle the waiting for you. They have an automated system that keeps dialing and navigating the IRS phone tree until it reaches a human, then it calls you to connect. So you're still in the same queue as everyone else, you just don't have to personally sit on hold. They're actually pretty transparent about how it works. I was skeptical at first too, but I figured it was worth trying after wasting so many hours on hold myself. It's really just a time-saver, not some magical back door to the IRS.

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CosmicCadet

•8M

I need to publicly eat my words about Claimyr being a scam. After dismissing it, I found myself in a complete panic when the IRS sent me a notice questioning my S Corp election that I'd filed months ago. I had documentation showing I'd submitted everything correctly, but couldn't get through to anyone. Reluctantly, I tried Claimyr and got connected to an IRS agent in about 20 minutes. The agent confirmed they had my Form 2553 in their system but it hadn't been processed correctly. They were able to fix it while I was on the phone and I received confirmation within a week. Saved me from what could have been a tax nightmare and hours of stress. Sometimes it's worth admitting when you're wrong!

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Chloe Harris

•8M

One thing nobody's mentioned yet is health insurance. If you're setting up an S Corp, the health insurance premiums you pay for yourself (as the >2% shareholder-employee) are handled differently than in a sole proprietorship. They need to be reported as wages on your W-2, but then you can take a self-employed health insurance deduction on your personal return. It's one of those little annoying differences that can trip you up if you're not aware of it. Same with retirement plans - the options and ways you fund them can differ between business structures.

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Chloe Harris

•8M

That's a good question and a common misconception. The health insurance premiums are added to your W-2 for income tax purposes only, not for FICA tax calculations. So they're included in Box 1 of your W-2 (wages subject to income tax) but not in Boxes 3 and 5 (wages subject to Social Security and Medicare taxes). Then you deduct those same premiums on your personal tax return via the self-employed health insurance deduction, which essentially makes them income-tax-neutral. It's just a weird reporting requirement that makes the accounting more complicated but doesn't actually increase your tax burden.

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