A marketing consultant called us last month, panicked: "I owe $30,000 in self-employment tax on $360K of profit. I feel like I’m working for the IRS, not myself."
Sound familiar? You’re not alone. We see profitable business owners make the same avoidable mistakes, costing them thousands in taxes, penalties, and lost opportunities.
If you’re a high-earning creative or consultant who’s moved beyond W-2 work, you’re likely sitting on major tax savings, as long as you avoid these five common traps.
These aren't just 'nice to know' tips. We recently helped a solo consultant restructure their business and save $24,150 per year in taxes. Over 10 years at 7% growth, that's $346,170 in additional wealth. That's life-changing money you can unlock through slight changes in your business structure.
Let's dive into the five mistakes that could be costing you thousands.
The Problem: Your business took off before you set it up correctly. You're operating as a sole proprietor or basic LLC, paying self-employment tax on every dollar of profit.
Most business owners default to whatever seems simplest at the start. But as your income grows, that ‘simple’ choice can become an expensive mistake fast.
The Solution: Make the S-Corp Election and maximize your tax savings
If you're making $360,000+ in net profit as a sole proprietor, you're paying $30,000 in self-employment tax alone. Electing to be taxed as an S-Corp could reduce your taxes significantly.
Real Numbers: Our solo consultant case study shows the dramatic difference:
The S-Corp election works by splitting your income into salary (subject to payroll taxes) and distributions (not subject to self-employment tax). Set a reasonable salary of $150,000, take $210,000 as distributions, and save over $7,000 in self-employment tax plus additional savings through QBI optimization.
Key Insight: The magic number where S-Corps typically become worthwhile is around $50,000 in net profit. Above $100,000, you're almost certainly leaving money on the table without this election.
The Problem: You're using personal accounts for business expenses, or vice versa. "I'll sort it out later" becomes an expensive habit.
This seems harmless, but it creates three serious problems:
The Solution: Complete financial separation starting with these four steps:
What to Run Through Your Business:
The return on this organization is immediate: cleaner books, maximum deductions, and bulletproof records if you're ever audited.
The Problem: You think a distribution is the same as paying yourself a salary. It's not.
With an S-Corp election, the IRS requires you to pay yourself ‘reasonable compensation’ through payroll before taking distributions. Get this wrong, not only will you face penalties, interest, and potential audit attention, you might miss out on some serious tax optimization.
The Solution: Smart salary structure that optimizes three key factors.
1. Set the Right Salary: Your reasonable salary should reflect what similar professionals earn in your industry. For our consultant with $400,000 in revenue and $360,000 in net profit, $150,000 was reasonable based on industry standards.
2. Withhold Properly: Use your salary withholdings as a tax planning tool. Adjust throughout the year based on your projected income to avoid big surprises at tax time. For S-Corp payroll setup, we recommend Gusto to handle withholdings, quarterly filings, and year-end W-2s.
3. Budget with Your Salary: Your regular salary creates predictable cash flow for personal budgeting, while distributions provide flexibility for reinvestment or additional personal draws.
Pro Tip: Document your salary research. Keep records showing why your chosen salary amount is reasonable for someone with your experience in your industry. This documentation protects you if questioned.
The Problem: Tax planning happens once a year, usually when it's too late to do anything about it.
Most business owners think about taxes in March when their CPA calls. But the best tax strategies require year-round attention and quarterly adjustments.
The Solution: Systematic planning calendar with three key frequencies.
Monthly Reviews:
Quarterly Actions:
Annual Planning:
Critical Deadline Alert: Missing quarterly tax payments triggers penalties. You need to pay either 100% of last year's tax liability (110% if over $150,000 income) or 90% of current year's liability. Set these dates in your calendar now.
Subscribe to our Key Tax Deadlines calendar to never miss a critical date: bit.ly/42JMoji
The Problem: The tax code is 75,000+ pages. Your business is unique. Generic advice doesn't cut it.
We love entrepreneurial spirit, but tax strategy isn't the place to wing it. The questions we get from successful business owners prove this point:
The Solution: Find a CPA who understands your unique situation and gives targeted, strategic advice when you need it.
Look for professionals who:
The Return on Professional Help: If proper planning saves you $15,000+ annually, a few thousand in professional fees pays for itself many times over.
These five mistakes cost business owners thousands of dollars every single year. Now you know what to look for and how to fix them.
Immediate Action Items:
The Bottom Line: The difference between a business owner who handles these fundamentals correctly and one who doesn't is often $20,000+ per year in taxes and peace of mind.
Your business success shouldn't be held back by basic structural mistakes. Fix these five areas, and you'll have a solid foundation for sustainable, tax-efficient growth.
Beyond bookkeeping, we are the end to end tax and financial service for founders and solopreneurs. From expense classifications to tax filing and recommendations, we have you covered.
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