Should I Be an S-Corp?

The S Corporation is one of the most abused ideas in creator finance. Now, that's not because it doesn't work, but it's because most creators have no idea when to use it. So what happens?Most people do it way too early or they way too long. And both of those mistakes cost you money. Sometimes thousands of dollars, sometimes a whole lot more.

Hey, I'm Ralph Estep Jr.I'm a licensed accountant with over 30 years of experience, and I work with content creators just like you and small business owners all over the world. I'm known as the content creator, creator's accountant. And the truth is, I've seen S Corp decisions made at every stage.Unfortunately, most of them were just wrong. So in today's episode, I'm going to show you a few things. We're going to start by talking about why the S Corporation is often misunderstood.Then I'm going to pivot into the two biggest mistakes traders make, and I'll give you a real decision framework to know when it actually makes sense to do an S Corp. Because this isn't a trend, this is a strategic move. Let's get right into this. I had two creators come to me within the same week. The first one making about $35,000 a year.Now, this person already had set up that S Corporation. The second one, listen to this. They were making $180,000 a year, and they were still operating as a sole proprietor. Both were wrong.The first one, the S Corporation, they were paying unnecessary costs. They were running payroll, they were doing extra filings. And guess what? There was no real tax benefit. They had made that election too early.Well, the second one. Second one was leaving thousands on the table. Same strategy, different timing, but very different outcomes. So let me jump right to it.The S Corporation is not a starting strategy. If you don't hear anything else I say today, an S Corporation is not where you start. An S Corporation is an optimization strategy.And if you don't understand that, you're going to either do two things. You're either going to overcomplicate your life way too early or you're going to miss savings too late. So let's get into what I talked about earlier.The two big mistakes, what I call Creator S Corporation chaos. Here's the first mistake if you do it too early.Now, a lot of times this advice comes from TikTok or these gurus, these YouTube shortcuts, you've probably heard it save thousands instantly. So creators think, well, Ralph, I need an S corporation right away. But here's the reality.At lower income levels, you're not going to save much money, but you're going to spend a lot of money. The costs are real and the complexity of an S corporation increases. Hear me on this.You're going to be adding payroll, you're going to be adding compliance. And listen, I love this part, but you're going to be adding accounting fees, but you're not going to have enough value to benefit to justify it.So that's the first thing. You do it too early, like we Learned with the $180,000 crater. The other problem is you wait too long. This is really the opposite problem.Creators grow, the income increases, but that structure never changes. So so many of you stay sole proprietors. And when you stay up sole proprietor, you're paying way too much tax.You're paying full self employment tax and you've got no income optimization. And at that point, unfortunately, it's costing you real money. So here's the real question. This is the million dollar question for today.When does the S corporation actually make sense? Now, I'm not talking about, you know, TikTok hype or some YouTube guru video. I'm talking about based on your numbers.Because this is where everything really changes. Now I want to give you what I call the decision framework.You're thinking to yourself, okay, Ralph, you've told me I can make it too early, I can make it too late. But you haven't told me how to do it. Well, guess what? Now I'm going to tell you how to do it. Here's what you got to consider. The first factor.You've got to look at your profit level. Now, you noticed I used the word profit. I'm not talking about revenue, I'm talking about profit. This is your first filter.This isn't the question of what did you make. That's revenue. That's what came in the door. But the real question I need you to answer is, is what did you keep after expenses? That is profit.And generally speaking, you need consistent profit before this even becomes a conversation. So before you even think about going to an S corporation, you've got to have consistent profit. Notice what I said there?I didn't say consistent revenue, I said consistent profit. So that's factor one. Factor number two, consistency kind of goes along with what I just said. One good month does not justify an S corporation.I've had so many people reach out to me and say, ralph, I just had the best month I've ever had. I better become an S corporation. Hold your horses. Not necessarily. You've got to have stable income and predictable cash flow.Because here's the thing, once you elect that S corporation status and it's an election, I'm not going to get into all the details about that. That's a little too much in the weeds. But once you elect it, you're committing to a structure.This structure has requirements, which is what we get to with factor number three. And that's a reasonable salary. And this is where a lot of people get confused. This is the thing they don't talk about.When you hear these knuckleheaded gurus all over TikTok and YouTube and reels talking about, oh, well, you got to become an S corporation. They don't tell you about the sneaky little side part of this.With an S Corporation, you've got to pay yourself what the IRS calls a reasonable salary. Here's the problem. Your reasonable and my reasonable and the IRS is reasonable are usually completely different things.And we can talk about that on another show. But here's the problem. That's not optional. You can't say, well, I'll pay myself a salary eventually. No, it's required.And here's the thing, that salary is subject to payroll taxes. You're going to have to pay yourself payroll taxes. Guess what? Now you've got to have a payroll system. You've got to start doing withholding.Did I just make your life complex? Yes, but in addition to that, that salary has to be justified. It has to be what the IRS calls reasonable. So think about that for a second.You've just made things complex. Now, I'm not saying it's not a good plan. I set up S corporations every single day and I save people thousands of dollars.But you've got to be consistent in that income to make sure this makes sense. Which leads me to factor number four, cost versus benefit. I'm an accountant.In my accounting school, the number one thing we were taught is cost versus benefit analysis. This is the real decision point we have to make here. You've got to really think about and compare the tax savings versus the additional costs.Yes, you're going to save money on taxes, but it's going to cost you money. Those costs are going to be things like a payroll service you're going to have to have a separate tax preparation.A lot of people don't understand this. You're going to have to prepare an S Corporation tax return in addition to your personal tax return. Well, guess what? I love that.You know why I love that? Because that's an extra fee. So you got to make sure that the cost makes sense with the savings.You also just increased your compliance requirements because of payroll, because of an extra tax return, because of a bunch of other people. And if the savings don't clearly outweigh the cost, guess what? It's too early.When I meet with clients, they say to me, ralph, how do I save money on taxes? I said, well, let's first look at how much are you actually paying in taxes? How much do you actually have in net profit?I will give you a basic number. If your content creation is earning you a net profit of around $10,000 a year, this is a no brainer.It will pay for itself in the amount of money that you save. But be prepared. You've got to have some complexities with that. But that's basically the takeaway number.Once you hit 15,000 or 20,000, hey, you're going to save money by doing this. But let's get to factor number five and that's integration with your system because that's really the key to this whole thing.This S Corporation election is only going to work if you've got clean bookkeeping, that tax vault I talk about on the show all the time, and really a separate four account system because that, that structure builds on structure. I don't know how many times I've worked with content creators who have set up this S Corporation.Yeah, they went out and checked the boxes, they paid a company to set these up. But man, when I looked under the hood, it was a disaster.They weren't keeping track of their income and expenses, they weren't doing payroll, they were completely out of compliance. That S Corporation was costing them money, but it wasn't helping them.Now maybe you're sitting there right now and thinking, ralph, I don't know if I should be an S Corporation or not. Well, that's exactly the point, isn't it? This isn't a guess, this is a calculation. And I can help you walk through that calculation.Let me tell you right now, you can go to contentcreatorsaccountant.com/helpme. I'll give you a free 15 minute call, I'll walk through your numbers.Because the truth is, the timing here has to be right to save you thousands of dollars. But again, reach out to me. That's at contentcreatorsaccountant.com/helpme.Well, let's go a little deeper now because so many people think, well, the S Corporation is going to work. Yes, it might, but the S Corporation itself doesn't save you money. This is a huge misconception. I see.Like I said, I call them the knuckleheaded gurus out there online. Well, you got to do the S Corporation. Going to save you a lot of money. Maybe, but it only works like I said earlier, when your income is high enough.If you're not making a profit with your content creation, don't bother doing the S Corporation. It's going to cost you a lot of money and you're not going to get any benefit from it.If you don't have a structure, if you don't have a standardized process of how you're keeping track of your accounting, do you have a payroll system? Don't do the S Corporation because it's going to make your life even worse. And if you don't have a salary to optimize, it makes no sense to do this.If you do do it, guess what? Do do it. My grandmother used to say, I done done it. There's a problem. You've just created complexity for your life.What the S Corporation really is, in my humble view, it's a scaling decision. You notice I use the word scaling. You don't start there. You grow into it.And this is all part of the whole strategy of this show to keep, grow and maintain. But you don't do this on day one. And the problem with this is that bad timing for so many creators creates frustration.As I said at the beginning, if you do it too early. And listen, I've heard this many times from creators that I work with. They say to me, ralph, why am I doing all this work?Why did I set up this S Corporation? Man, I. You told me I have to take a paycheck. I don't even have enough money coming in to pay myself, Ralph. That's the problem of doing it too early.But if you do it too late. I just had a meeting with a person the other day.I've been telling them year after year after year, you need to move away from the sole proprietorship. You need to move to an S Corporation. And every year they say to me, when I file their taxes, ralph, I can't believe I'm paying this much.You're not listening to me. That's why. But it's all about the right timing. Because when you get this right. And there is a time to get this right.You can reduce unnecessary taxes. I'm not talking about tax evasion. I'm talking about tax avoidance. It's legal and it's strategic.You gain a beautiful structure, and as your business evolves, you can make decisions with confidence, not based on hype, but on real numbers. What's really going on on the ground in your business. You operate like a real business owner. That's the key to this whole thing.You're not reacting anymore. You're planning and you're being strategic. The S Corporation is not magic. It's a tool.And like any tool, if you use it at the wrong time, it causes more harm than good. But used at the right time, it is super powerful. So my takeaway today, don't ask, should I have an S Corporation? That's not the right question.The right question to ask, is this the right time for me to have an S Corporation? And as I said earlier, if you want help answering that, go to contentcreatorsaccountant.com/helpme.Again, that's content contentcreatorsaccountant.com/helpme. Well, I am Ralph Estep Jr. And I am the content creator's accountant.And I help creators just like you, protect, keep and grow what they work so hard to earn. And I'll see you again in the next episode.