Sole Proprietor to S Corp

• Sep 15, 2025 wisecpa

From Sole Proprietor to S-Corp: Is It Time to Make the Switch?

If you’re a freelancer, consultant, or contractor, you’ve probably wondered whether sticking with a sole proprietorship is your best option—or if it might be smarter to make the leap and structure your business as an S corporation. For many Delaware small business owners, this switch can provide significant advantages, especially when it comes to taxes and liability protection.

Let’s break down the main benefits, the potential drawbacks, and when it might make sense to make the move.

Why Business Owners Choose S Corporations

Tax savings on self-employment income
As a sole proprietor, all of your earnings are hit with the full 15.3% self-employment tax (covering Social Security and Medicare). With an S corporation, income can be divided into two parts:

• A reasonable salary (subject to payroll taxes)

• Distributions (subject to income tax, but not payroll taxes)

This structure can reduce the amount you owe in self-employment taxes.

Pass-through taxation
Like sole proprietors, S corporations are “pass-through entities.” Instead of the business paying corporate taxes, profits and losses flow directly to your personal tax return. This avoids the double taxation that comes with C corporations.

Legal protection
An S corp creates a clearer boundary between personal and business assets. That separation can offer peace of mind if your line of work involves legal or contractual risks.

The Trade-Offs to Consider

While the tax savings are appealing, becoming an S corporation also comes with new responsibilities:

• Payroll setup – Even if you’re your only employee, you’ll need a payroll system to handle wages and withholdings.

• Separate tax filings – In addition to your personal tax return, your business must file a Form 1120-S by March 15th.

• Professional accounting support – Many business owners rely on an accountant or bookkeeper to stay compliant.

• Reasonable salary rules – The IRS expects you to pay yourself a fair wage. Lowballing to dodge taxes can trigger penalties.

• State requirements – Some states charge annual fees or franchise taxes, even for small corporations.

When Does It Make Sense to Switch?

Typically, the S corp structure starts making sense when your net income (after expenses) reaches $75,000 to $100,000 per year or more.

For example:

• As a sole proprietor with $120,000 in profit, you’d owe around $18,000 in self-employment taxes.

• As an S corp, paying yourself a $60,000 salary, payroll taxes would run about $9,200. The other $60,000 would avoid payroll taxes, potentially saving you nearly $9,000 annually.

That’s a big difference, but it’s not always the right fit for every entrepreneur.

Final Thoughts

Switching from sole proprietorship to S corporation can be a smart tax move—but it’s not a one-size-fits-all solution. The best approach is to evaluate your numbers annually and work with a trusted Delaware small business accountant to ensure your structure aligns with your goals.

At Wise Accounting, we help business owners across Delaware understand their options, minimize tax burdens, and stay compliant every step of the way.

👉 Want to read the original article? You’ll find it here: Wise Business Solutions Newsletter