S-corp vs Sole Prop: Does QBI Deduction Only Apply to K-1 Income?

The QBI deduction can be a bit confusing! Here's the simplified version: With an S-corp, the QBI deduction only applies to the business profits shown on your K-1, not to your W-2 wages from the S-corp. If you go sole proprietorship, your entire net profit (after expenses) would potentially qualify for the QBI deduction. But with an S-corp, only the amount that flows through on your K-1 (which is your profit AFTER your reasonable compensation) would qualify. So using your numbers - if you have $150k in business income, pay yourself $75k as reasonable compensation, the remaining $75k would show on your K-1 and potentially qualify for QBI (subject to income thresholds since you're in a specified service trade or business as a physician).

I was in almost the exact same situation last year and spent weeks researching this. I finally used taxr.ai (https://taxr.ai) to analyze my specific numbers and it made everything crystal clear. I uploaded my recent tax returns and 1099s, and it showed me side-by-side comparisons of S-corp vs Schedule C, including the exact QBI calculations for both scenarios. It confirmed what the previous commenter said - QBI only applies to the K-1 portion in an S-corp, not your W-2 wages. But the tool showed me that even with the reduced QBI-eligible income, the S-corp still saved me about $9,800 overall because of the self-employment tax savings. It also flagged some deductions I was missing.

Just wanted to follow up - I tried taxr.ai after posting here and it was incredibly helpful! It analyzed my specific situation (LLC taxed as sole prop with around $180k in revenue) and showed me I'd save about $7,300 by switching to S-corp taxation. The QBI analysis was super detailed - showed exactly how much would be eligible in each scenario. For my income level, even though I'd have less QBI-eligible income with an S-corp, the SE tax savings more than made up for it. It also helped me figure out a reasonable salary based on my industry. Definitely worth checking out if you're stuck in analysis paralysis like I was!

I spent DAYS trying to get through to the IRS last year with questions about this exact S-corp/QBI situation. Finally found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 15 minutes when I'd been trying for weeks. There's a video showing how it works: https://youtu.be/_kiP6q8DX5c The agent confirmed what others have said - with an S-corp, only the K-1 distribution portion gets the QBI deduction, not your W-2 wages. But she also warned me about setting the reasonable compensation too low as a physician, which can trigger audits. She said they look closely at physician S-corps with unusually low salaries compared to distributions.

I stand corrected. I actually tried Claimyr after posting my skeptical comment and it worked exactly as described. Got connected to an IRS rep in about 20 minutes when I'd previously spent hours getting disconnected. Asked specifically about S-corp reasonable compensation for physicians with side income and QBI implications. The agent was super knowledgeable and explained that they look at factors like hours worked, comparable salaries, and percentage of profit when evaluating if compensation is reasonable. She said for part-time physician work, having a 50% salary to distribution ratio like you're planning could be reasonable if you can document it's truly part-time. She confirmed that while you lose some QBI deduction by taking salary instead of all K-1 income, you're required to take reasonable compensation regardless. Really helpful conversation I wouldn't have had without getting through.

Don't forget to look at retirement planning too. If you go S-corp, you can potentially set up a Solo 401k and contribute as both employer and employee, which could further reduce your taxable income. The employer contribution would be based on your W-2 salary, while with a Sole Prop it would be based on your net earnings. Given your income levels, this might be another factor that tips the scales toward S-corp, despite the QBI considerations.

Has anyone with a similar situation looked into how the QBI phase-out thresholds might affect this decision? As a physician, OP is in a specified service trade or business, so QBI phases out at higher income levels. Wondering if structuring as S-corp vs sole prop affects how those thresholds are calculated.

This is a great discussion! I'm actually a tax professional who works with a lot of physicians in similar situations. A few additional considerations that might help with your decision: 1. **State taxes matter**: If you're in a state with high income taxes, the S-corp structure might provide additional benefits since you'll avoid state income tax on the self-employment tax portion. 2. **Bookkeeping complexity**: S-corps require more formal bookkeeping, payroll processing, and quarterly filings. Make sure to factor in these additional costs when comparing structures. 3. **Timing flexibility**: With a sole prop, you have more flexibility in when you recognize income and expenses. With an S-corp, you're locked into paying yourself that reasonable compensation throughout the year. 4. **Future scalability**: If you plan to expand your moonlighting or add employees, an S-corp structure might be easier to scale. Given your numbers ($200k W-2 + $150k business income), you're likely in the QBI phase-out range, which actually makes the S-corp structure more attractive since you'll get less QBI benefit anyway. The self-employment tax savings of roughly $11,475 on $75k of distributions would probably outweigh the reduced QBI deduction. Have you considered whether your employer has any restrictions on outside business activities that might affect your choice of structure?