Starting a small barber business: LLC as sole proprietorship vs S-Corp tax benefits?

Setting up your barbershop as either a sole proprietorship or S-Corp has different tax implications that depend on your expected profit level. For lower income levels (generally under $40k-50k profit), a sole proprietorship is usually simpler and cheaper to maintain. You'll file Schedule C with your personal taxes, and pay self-employment tax (15.3%) on all profits. Once you're consistently making higher profits (typically $60k+), an S-Corp might save you money. With an S-Corp, you'd pay yourself a "reasonable salary" subject to employment taxes, but additional profit can be distributed as dividends that aren't subject to self-employment tax. But yes, you would need to set up payroll to pay yourself a salary - this means quarterly payroll tax filings and withholding taxes. Just remember with an S-Corp comes more administrative work: separate tax return (Form 1120S), payroll processing, stricter compliance requirements, and likely higher accounting/tax preparation fees.

After struggling with this same decision for my mobile detailing business, I found this amazing tool at https://taxr.ai that literally saved me thousands in taxes. I uploaded my projected income numbers and business plan, and it analyzed whether I should go LLC/Sole Prop or S-Corp based on my specific situation. What really helped was seeing the exact tax savings breakdown year by year as my business grows. It showed me I should start as sole prop then switch to S-Corp once I hit about $75k in annual profit. The tool even gave me a customized report explaining when and how to make the switch.

Just wanted to follow up about that https://taxr.ai site - I decided to try it after asking about it here. Seriously impressed with how detailed the analysis was! It showed me exactly where the breakeven point is between sole prop and S-Corp for my situation (about $65k in profit for my state). The most helpful part was seeing how much I'd save each year with either option as my business grows. Apparently in my first year I'm better off as sole prop, but by year 3 with projected growth, S-Corp saves me about $4,700 in taxes. It even factored in the additional accounting costs of maintaining an S-Corp! Definitely recommend checking it out if you're on the fence.

Been through this with my woodworking business. Something nobody mentioned yet: the IRS is basically impossible to get on the phone right now if you have questions. When I was setting up my business structure, I spent DAYS trying to get someone to clarify S-Corp requirements. Finally found Claimyr https://claimyr.com and used their service - they got me connected to an actual IRS agent in about 20 minutes instead of waiting on hold forever. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. Saved me hours of hold music and I finally got my S-Corp questions answered directly from the source.

I need to eat my words about that Claimyr service. After posting my skeptical comment, I decided to try it anyway because I was desperate to reach the IRS about my late S-Corp filing. I'm shocked to say it absolutely worked. Got a call back in about 35 minutes and was connected directly to an IRS representative who helped sort out my filing extension. Saved me from what would have been hours on hold (if I even got through at all). For anyone debating between business structures like the original poster, being able to actually talk to the IRS when questions come up is incredibly valuable. They answered questions about reasonable salary requirements that my accountant wasn't even 100% sure about.

Don't overlook the state tax implications too! Some states (like California) charge minimum annual taxes for LLCs/Corps regardless of whether you make a profit. Was a nasty surprise my first year. Also, think about what happens if your shop really takes off. S-Corp has limitations on shareholders (max 100, must be US citizens/residents) that might matter later if you want to expand or bring in investors. One more thing - in my experience, sole prop is better when you're starting out and might have initial losses. Those losses can offset other income on your personal return immediately, which isn't as straightforward with an S-Corp.

What software are you planning to use for accounting? If you go S-Corp, you'll need something that can handle payroll. I use QuickBooks Online ($40/month) + their payroll add-on ($45/month) for my lawn care business and it works great for S-Corp. For sole prop it's way simpler - you could even use something basic like Wave (free) or just a spreadsheet if you're organized.

One thing to watch out for with those 1099 barbers - make sure they TRULY qualify as independent contractors and not employees. The IRS is cracking down on misclassification. For barbers to be legitimate 1099 contractors, they should: - Set their own schedules - Bring their own tools/equipment - Set their own prices - Have their own business identity/clientele If you're providing all equipment, setting their hours, and controlling how they work, the IRS might consider them employees regardless of what you call them.

Great question! I went through this exact decision two years ago when I started my tax prep business. Here's what I learned: Start as a sole proprietorship (LLC taxed as sole prop) for your first year or two. It's simpler, cheaper to maintain, and gives you flexibility while you're getting established. You'll just file Schedule C with your personal return and pay self-employment tax on profits. The magic number where S-Corp starts making sense is usually around $60-70k in annual profit. At that point, the self-employment tax savings from S-Corp election can offset the additional complexity and costs. For payroll with S-Corp - yes, you absolutely need to set up payroll to pay yourself a reasonable salary. I use ADP for about $60/month, but QuickBooks payroll works too. The IRS is very strict about this - no salary means no S-Corp benefits. My advice: Focus on getting your business profitable first, then revisit the S-Corp election once you have a solid year of income data. You can always elect S-Corp status later (effective beginning of the tax year you make the election). Good luck with your barbershop! The chair rental model is smart - just make sure you have solid rental agreements in place.

One more consideration that might be helpful - don't forget about quarterly estimated tax payments! Whether you go sole prop or S-Corp, you'll likely need to make quarterly payments to avoid penalties since you won't have taxes automatically withheld like with a W-2 job. For sole proprietorship, you'll calculate these based on your expected net profit and self-employment tax. For S-Corp, it's a bit more complex since you'll have both payroll taxes (handled automatically if you use payroll software) and taxes on any distributions. I'd recommend setting aside about 25-30% of your net profit in a separate savings account for taxes - better to overpay than get hit with penalties. Once you get through your first year, you'll have actual numbers to work with for more accurate quarterly estimates. Also, since you're opening next month, make sure you get an EIN (Employer Identification Number) even if you start as sole prop. You'll need it for business banking and it makes things smoother if you decide to switch to S-Corp later. The IRS website lets you get one instantly online - takes about 10 minutes.