Appreciation post: My accountant told me a freelancer in our city made over $200k last year but paid less tax than I did.

I found this out during my tax meeting yesterday when she was explaining different business structures. She said this person runs everything through an S-Corp and pays themselves a 'reasonable salary' to save on self-employment taxes. I always thought an LLC was enough. Do you think the extra paperwork for an S-Corp is worth it for a solo freelancer?

4 comments

4 Comments

blake_owens2mo ago

That 'reasonable salary' part is the tricky bit the IRS watches closely.

bell.jessica2mo ago

Saw a tax guy talk about this on a podcast last week. He said the IRS looks at what other people in your field make for a similar job. Like if you're a plumber running an S-Corp, they check what employed plumbers in your area earn. Paying yourself way less than that is a red flag. They want to see a real wage before the profit distributions kick in.

the_ben2mo ago

My old tax guy always pushed me to stay as a sole prop, said the S-Corp fees weren't worth it. But seeing the math on a $200k income, the self-employment tax savings alone could easily cover the extra accounting costs. You really have to run the numbers for your own situation, because that "reasonable salary" rule means you can't just pay yourself nothing. It's a trade-off between paperwork and potential savings.

adam1869d ago

Exactly. The "reasonable salary" rule is where most people mess up with an S-Corp. I talked to a CPA in Ohio last year who said the IRS has gotten way more aggressive about this. They pulled records from plumbing companies in Columbus and checked what owners were taking as wages. If you're paying yourself $20k when the market rate is $70k, that's a massive red flag like @the_ben said. The math can work great if you pay a fair salary and take the rest as distributions. But if you go too low, you'll end up paying back taxes plus penalties and interest that eat up all the savings. It's really about finding that sweet spot where the salary is high enough to pass audit but low enough to save on self-employment tax.