If you have a business that you own yourself, you have two major filing options: creating an S corporation or filing as a Schedule C. Under both of these options, you're a sole proprietorship. The major difference is in how you pay your taxes.
What Is the Difference Between an S-Corp and a Schedule C?
To file as an S corporation, you would need to create a corporation with your state. This usually has a filing fee. To file as a Schedule C, all you need to do is add an additional form to your tax return at the end of the year. No additional paperwork needs to be filed.
Forming an S corporation creates a second entity which will gain income for you. This income is not taxed until it is taken by you as income. When you file a Schedule C, you instead take income as you earn it, and need to pay taxes on all of that income.
What Are the Advantages of an S-Corp Over a Schedule C?
If you want to retain value within your company and invest it in future growth, an S corporation is better. An S corporation will be able to hold income inside of itself, investing it and spending it as desired, without paying taxes on that income until you pay yourself out.
If you're earning a significant amount of money in your business, you usually want to transition to an S corporation or an LLC at some point, in order to protect yourself from additional tax burden.
What Are the Advantages of a Schedule C?
Schedule C tax returns are far simpler to file. While you do need to pay taxes on all of your income, you don't need to file a separate business tax return. Further, you aren't required to maintain things like workers' compensation insurance, which a business is typically required to maintain.
For those who are already likely going to take the majority of their income out of their business and use it personally, an S corporation will only delay taxes rather than avoiding it.
Deciding how to structure your business is actually a fairly significant decision. Ideally, you should meet with both a tax accountant and an attorney before you make a final decision. Many businesses will eventually need to become an S corporation if they grow significantly. However, those who aren't yet making a lot of money in their business may continue to file as a Schedule C for a while.
Contact a company that offers accounting services to learn more.