Your business structure controls how profits get taxed, how much self-employment tax you owe, and what you’re required to file each year. For most trades and service businesses, the difference between the wrong structure and the right one is thousands of dollars annually.

Most contractors and trades business owners start as a sole proprietorship or single-member LLC. All business profit flows to your personal tax return on Schedule C, and you pay self-employment tax of 15.3% on top of your regular income tax. If your business clears $100,000 in profit, about $14,000 goes to self-employment tax alone. It’s simple to manage but gets expensive fast as your income grows. In California specifically, a single-member LLC also owes an $800 annual franchise tax plus an additional LLC fee once gross receipts exceed $250,000. That fee can range from $900 up to $11,790 depending on your revenue.

The S-Corporation election is where most trades business owners see the biggest savings. With an S-Corp, you pay yourself a reasonable salary and take the remaining profit as a distribution. Only the salary portion gets hit with payroll taxes. The distribution passes through to your personal return as income but avoids that 15.3% self-employment tax. Say your business profits $150,000. As a sole prop, self-employment tax applies to the full amount. As an S-Corp paying yourself $80,000 in salary, only that $80,000 gets payroll taxes. The other $70,000 comes to you as a distribution, saving you roughly $10,000 per year. California does charge S-Corps a minimum $800 franchise tax plus 1.5% on net income, so you need to factor that into the math before making the switch.

If you run a business with a partner, you’re likely operating as a partnership or multi-member LLC. Profits get split according to your agreement and each partner pays self-employment tax on their share. Many partnerships eventually elect S-Corp status for the same payroll tax savings once the numbers justify it.

C-Corporations are rarely the right fit for trades businesses. Profits get taxed at the corporate level first, then taxed again when distributed to you as dividends. That double taxation creates a problem that usually outweighs any benefits for service-based businesses under a few million in revenue.

The right time to consider switching from a sole prop or LLC to an S-Corp is generally when your net profit consistently lands above $60,000 to $80,000 per year. Below that threshold, the extra payroll administration and filing costs eat into the tax savings. Above it, you’re probably leaving money on the table every year you wait. This is where tax strategy becomes important because the decision depends on your actual numbers, not rules of thumb.

None of this works without accurate financials. You need reliable profit figures to decide whether a structure change makes sense, and you need clean books to run an S-Corp correctly. Setting a reasonable salary requires knowing what your business actually earns, and the IRS will scrutinize that number if it looks too low. Bookkeeping for trades businesses is the foundation that makes smart tax planning possible. Without it, you’re guessing at the most important financial decisions your business faces.