For self-employed professionals and small business owners in the San Francisco Bay Area, understanding how to structure your business can significantly impact your tax liability and retirement contributions. At Flex Tax and Consulting Group, we help clients across San Francisco, Castro Valley, and the greater Bay Area make informed decisions about tax strategy, entity selection, and Solo 401(k) optimization.
Recommend Solo 401K Platform – Solo 401K
This guide compares how Sole Proprietorships (or Single-Member LLCs) and S Corporations (S-Corps) affect Solo 401(k) contribution potential, tax exposure, and administrative responsibilities.
Solo 401(k) Contribution Comparison (Based on $400,000 Profit)
| Category | Sole Proprietor / LLC | S-Corp |
|---|---|---|
| Net Income / Total Profit | $400,000 | $400,000 |
| W-2 Salary | Not applicable | $150,000 |
| Self-Employment / Payroll Tax | Approx. $56,000 (on full income) | Approx. $22,950 (on W-2 only) |
| 401(k) Employee Deferral | $23,000 | $23,000 |
| 401(k) Employer Contribution | $46,000 (IRS-capped) | $37,500 (25% of $150,000) |
| Total 401(k) Contribution | $69,000 | $60,500 |
| Administrative Complexity | Low | Medium to High |
| Self-Employment Tax Exposure | High | Low |
| Flexibility to Max Out Contributions | Easy | Requires a higher W-2 salary |
| Distributions Not Subject to SE Tax | Not allowed | Allowed |
Analysis: Sole Proprietor vs. S-Corp
Sole Proprietor or Single-Member LLC
Pros:
-
Simple to operate, no payroll setup needed.
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Easier to max out retirement contributions under Solo 401(k) rules.
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All profits (after adjustment) are eligible for employer-side 401(k) contributions.
Cons:
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Entire net income is subject to self-employment tax.
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Limited tax planning flexibility compared to an S-Corp.
S Corporation
Pros:
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Split income between W-2 salary and distributions to reduce self-employment taxes.
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Distributions are not subject to FICA/SE tax.
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Better long-term tax planning as income scales.
Cons:
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Requires formal payroll and additional administrative work.
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401(k) contributions based only on W-2 wages.
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A high salary may be required to reach the Solo 401(k) cap.
Which Option Is Right for You?
| Goal | Best Structure |
|---|---|
| Maximize Solo 401(k) contribution | Sole Proprietor / LLC |
| Reduce self-employment taxes | S-Corp |
| Maintain administrative simplicity | Sole Proprietor / LLC |
| Maximize long-term tax efficiency | S-Corp |
If you are located in the Bay Area and earning over $150,000, setting up an S-Corp in California may offer meaningful tax savings over time. However, if you prefer a leaner structure while still contributing aggressively to your retirement, a Sole Proprietorship or Single-Member LLC may serve you better.
Talk to a Bay Area Tax Advisor
At Flex Tax and Consulting Group, we specialize in Solo 401(k) planning, entity structuring, and tax reduction strategies for independent contractors, consultants, and small business owners across the San Francisco Bay Area, especially in Castro Valley and San Francisco.
We offer personalized consultations to evaluate whether an S-Corp is right for you, how to structure your compensation, and how to legally minimize your tax burden.
Schedule a consultation today:
https://flextcg.zohobookings.com/#/taxadvisory
About Flex Tax and Consulting Group
Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.
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