Dual Income Streams: Filing Taxes as Both a Sole Proprietor & S-Corp

Question recently came in from SimpliMD community member through our private Facebook Group “Every Doctor Is A Business”. This would be a good time to encourage you to join if you haven’t done that yet. I love this group because it is a great place to help each other and get a quick answer.

Here is the question:

Thank you for your emails. I find a lot of them informative. I incorporated almost 2 years ago. Still learning. My S Corp is based in California where I reside and do most of my shifts. 

One thing that came up when I was filing my taxes is: can you file both a Schedule C for a sole prop AND also K1/W2 for S Corp? And this question probably leads (or originates) from another question: Is all income an S Corp income, or is certain income, say work I do in other state, an income that goes straight to me as 1099, not to my S Corp? 

And ultimately, is there an advantage to diversify here, or should I funnel everything under my S Corp? 

 

My answer was:

So nice to hear from you as I love connecting with our community.

Let me start by saying I am not an accountant or tax professional:)

I think I understand your question so I am going to break it down and unpack things below (hang on, it may a bit lengthy).

Filing Taxes as a Sole Proprietor (1099 Income)

As a sole proprietor receiving 1099 income, you report your income and expenses on Schedule C (Form 1040). Here’s how it works:

1. Income Reporting: You report all income earned from your independent contracting work, which is usually documented on Form 1099-NEC. This is the income you earn directly from your patients or clients without any intermediary business structure.

2. Expenses and Deductions: You can deduct business-related expenses on Schedule C, such as office supplies, professional fees, travel, and other expenses directly related to your practice.

3. Self-Employment Tax: As a sole proprietor, you are responsible for paying self-employment taxes, which include Social Security and Medicare taxes. This is reported on Schedule SE (Form 1040).

Filing Taxes as an S-Corporation (W-2/K-1 Income)

When you have an S-corporation, the tax reporting is slightly more complex:

1. W-2 Income: As an owner of an S-corp, you are considered an employee of your corporation. You should pay yourself a reasonable salary, which will be reported on Form W-2. This salary is subject to payroll taxes, and you will need to withhold federal and state income taxes, Social Security, and Medicare taxes.

2. K-1 Income: Any profits remaining in the S-corp after paying yourself and other business expenses can be distributed to you as dividends. These distributions are reported on Schedule K-1 (Form 1120S). While this income is subject to federal and state income taxes, it is not subject to self-employment tax, which can result in tax savings.

Integration on Your Personal Tax Return

On your personal tax return (Form 1040), you will need to include income from both your sole proprietorship and your S-corporation:

1. Schedule C: Report your sole proprietor income and expenses.

2. Schedule SE: Calculate and report your self-employment tax for the sole proprietorship income.

3. Form W-2: Include your W-2 income from the S-corp as part of your overall wage income.

4. Schedule E: Report your K-1 income from the S-corp. Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and rental real estate.

One little caveat to keep in mind is that the IRS tends to target filers using schedule C for audits, so if you can avoid having a schedule C that is best for you. Routing your income through a micro-corporation taxed as an S-corp rather than as a sole proprietor will fix that.

Key Considerations

1. Reasonable Compensation: It’s crucial to ensure that the salary you pay yourself from the S-corp (reported on Form W-2) is considered reasonable by IRS standards. The IRS can reclassify distributions as wages if they believe the salary is unreasonably low, which could lead to additional taxes and penalties. You can read more about this at my post Determining Your Salary as a Self-Employed Doctor

2. Estimated Tax Payments: If your combined income from the sole proprietorship and S-corp results in significant tax liabilities, you might need to make estimated tax payments throughout the year to avoid underpayment penalties.

3. Professional Guidance: Given the complexity of handling multiple sources of income and the specific regulations governing S-corporations and sole proprietorships, it’s advisable to work with a tax professional who can help you navigate the nuances and ensure compliance with IRS rules.

I get it, that was a lot of business and tax stuff that was unpacked. So let’s get practical and look at a real life scenerio to apply things.

Example Scenario

Dr. Smith is a physician who practices independently and also owns an S-corporation that manages part of his practice.

• As a Sole Proprietor: He sees patients independently and earns $100,000 reported on Form 1099-NEC. He deducts $20,000 in business expenses on Schedule C, resulting in a net income of $80,000. He pays self-employment tax on this amount through Schedule SE.

• Through His S-Corporation: The S-corp generates $200,000 in total revenue. Dr. Smith pays himself a salary of $100,000 (reported on Form W-2) and deducts $50,000 in business expenses. The remaining $50,000 is distributed to him as a dividend, reported on Schedule K-1.

On his personal tax return, Dr. Smith will:

• Report the $80,000 sole proprietor net income from Schedule C.

• Include the $100,000 W-2 income from his S-Corp.

• Report the $50,000 K-1 income on Schedule E.

By managing his income this way, Dr. Smith can optimize his tax liabilities, taking advantage of deductions available to his sole proprietorship and the favorable tax treatment of S-corp distributions.

I hope that provides you with your answer: so “yes” can you file BOTH sole proprietor with schedule C AND K1/W2 with your S-Corp.

Having said that, unless there are some compelling reasons, for tax and liability purposes, I would personally route everything through my S-Corp.I explain this further in my post Which Corporate Structure Is Best For Self-Employed Doctors? Part 1

How you receive the income is based on what you designate on your W-9 form.How To complete a W-9 Form: Tax Advantages For The 1099 Employee One contract may flow through your sole proprietor, and another may flow your S-Corp, you get to decide (they have different tax ID numbers).

If you are in need of some personalized guidance? Schedule a micro-business consultation with me today to ensure your entity formation and tax approach are set up for success—book your consultation now!