Is Being Taxed as an S Corp Right for You? A Focus on Certified Registered Nurse Anesthetists (CRNAs)

As a Certified Registered Nurse Anesthetist (CRNA) making the transition from a W2 employee to a 1099 independent contractor, you’re likely navigating a new set of challenges—chief among them: how best to structure your business and minimize your tax liability. You should consider electing to be taxed as an S Corporation (S Corp). While this tax structure can offer tax savings, it also comes with additional compliance requirements that can incur costs and administrative work. The key question: Is it worth it?

The Value Proposition of Electing S Corporation Taxation

When transitioning from W-2 to 1099 status, you become responsible for both the employer and employee portions of payroll taxes, also known as self-employment taxes. These taxes, covering Social Security and Medicare, total 15.3% and are calculated on your net income if taxed as an LLC.

However, electing to be taxed as an S Corp offers one potential strategy to reduce this tax burden. Under an S Corp structure, only your salary—rather than your total net income—will be subject to self-employment taxes. This allows you to pay yourself a “reasonable salary”.  Only the reasonable salary is subject to payroll taxes while the remainder of your income can be taken as distributions, which are not subject to self-employment taxes.

Simplified Example Calculation

Let’s assume:

• You own 100% of an S Corp.
• The company makes $400,000 in net profit.
• You and your accountant determine a reasonable salary for your industry to be $120,000. (Note: We are not saying $120,000 is a reasonable salary. The IRS does not have clear guidelines. Reasonable salary based on historical data to avoid IRS scrutiny, but the overall guidelines are unclear.)
• The remaining $280,000 is taken as a distribution.

Tax Breakdown:

• Salary ($120,000)
  • Payroll Taxes: $120,000 × 15.3% = $18,360 (both employer and employee)
• Distributions ($280,000)
  • NOT subject to self-employment taxes.
  • Still subject to federal and state income tax.

Total Self-Employment Taxes (FICA): $18,360

Compare this to a sole proprietor or LLC (without S Corp election), where the entire $400,000 would be subject to 15.3% self-employment tax, totaling $61,200.

Compliance Costs and Other Considerations

The potential tax savings from electing S Corp taxation must be weighed against increased compliance costs.  Key considerations include:

1. Reasonable Salary
   As an S Corp, you must pay yourself a “reasonable salary” for your industry.  We recommend consulting a professional group (such as Finances Simplified 😊) to determine the salary based on historical industry data and properly document for compliance. If your salary is deemed too low, tax authorities may reclassify a portion of your distributions as wages, making them subject to payroll taxes.
   
2. Payroll Services
   To ensure proper tax withholding and compliance, it is highly recommended to process your reasonable salary through a payroll service provider. Payroll service fees vary but assume $50-$75 / month.
   
3. Bookkeeping and Record-Keeping
   Keeping track of your business finances becomes critical when you elect S Corp taxation. Accurate record-keeping is required for both tax filings and to ensure all of your deductions are properly captured and documented. Hiring a bookkeeper and paying for accounting software can vary in price depending on complexity, reporting needs, transaction volume, etc.
   
4. Tax Filing Requirements
   S Corps must file an informational tax return (Form 1120S) in addition to the standard personal tax return (Form 1040), incurring additional preparation and filing costs.
   
5. Wait!  Other Factors to Consider
   
   1. Consult a Lawyer
      This blog does not provide legal advice, and S Corp election involves legal considerations beyond its scope. It is recommended to consult a lawyer to understand the legal implications before making an election. While we provide financial guidance, legal counsel is necessary to ensure informed decision-making.
      
   2. Engage a Tax Professional
      This blog provides a general overview of how S Corp election may impact tax liability. However, determining whether it is beneficial requires a detailed analysis of individual circumstances. Consulting a tax professional, such as Finances Simplified, ensures a comprehensive evaluation, helping to make an informed decision and avoid unexpected tax consequences.

Conclusion

Electing to be taxed as an S Corporation can be a smart financial move for a CRNA, especially if you anticipate earning a high income as an independent contractor. The savings on self-employment taxes can offset the additional compliance costs of payroll services, bookkeeping, and tax filings. However, it’s crucial to consider whether the administrative work and costs involved will outweigh the tax savings based on your individual situation. We recommend discussing your options with your accountant. Alternatively, feel free to reach out to us at Finances Simplified.