Sole proprietors and single-member LLCs report business income on Schedule C of their personal Form 1040 and pay income tax plus self-employment tax (15.3%) on net profit. S-Corps pass income through to shareholders' personal returns but split income between salary (subject to payroll taxes) and distributions (not subject to self-employment tax), often saving $5,000-$15,000 annually in SE tax for profitable businesses. Consult a CPA when your net profit consistently exceeds $60,000 to evaluate whether an S-Corp election makes sense.
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