The difference will come in the area of self-employment
tax (this is why I recommend that as you get to 50,000 or so of profit, an s-corp ALL OTHER THINGS BEING EQUAL may make some sense).
Let's say we have two businesses making the same net profits of $60,000 last year ($5,000/month). The only difference is that X is a Sole Proprietor
and Y is the sole shareholder/owner in an S-Corporation.
In the sole proprietorship, there is no difference between X and the business. X has to pay self-employment taxes (Social Security + Medicare
) of 15.3% on the entire $60,000 annual net profit, or about $9,200. He also must pay federal
and local income taxes
on that income
Y however, wears two hats: she is the sole shareholder of that corporation, and also the sole employee. As the corporation shareholder, she owns a business with $5,000 of overall profits each month, but also pays out $4,000 for that one extremely loyal employee. That means $1,000 per month is not paid out as salary, and will be distributed to the shareholders (her) as dividends
, or unearned income.
At tax time, Y gets $48,000 a year in earned income
as an employee, and $12,000 in S-Corp distributions as a shareholder. You only pay self-employment taxes on earned income. $48,000 x 15.3% = $7,400. She also must pay federal and local income taxes, the same amount as X.
So as an S-Corporation, Y paid $1,800 a year less than X in taxes.
But for a sole proprietor, it is, as you said a wash here. It's all EARNED, self employment income, whether you "call" it a salary or not.