Eileen’s trading business

Individual TTS vs S-Corp

§475 mark-to-market + QBI deduction · Two planning scenarios

· Prepared for Kevin and Eileen by ChatGPT

Results at a glance

For $200,000 in annual trading profit with §475, including the eligible federal QBI deduction:

  1. Individual TTS has slightly lower income taxes. $28,095 with Individual TTS versus $29,257 with an S-Corp paying a $50,000 salary — a $1,162 difference, including company and household income taxes.
  2. With the S-Corp and a $50,000 salary:
    1. About $9,000 in payroll contributions ($8,692 in this estimate), including employee and employer shares, fund Social Security, Medicare, disability, unemployment and related programs.
    2. $17,200 can go into your two Roth IRAs — $8,600 each, using 2026 limits for two spouses age 50+. Eileen’s wages support both contributions; the deposits are not tax-deductible.
  3. An S-Corp requires more paperwork. Quarterly payroll reports, annual federal and California corporate returns, W-2s and shareholder K-1s, plus payroll and bookkeeping administration.

Payroll contributions fund public benefits; they are not balances in your personal retirement accounts. Roth IRA deposits remain your own savings. These are planning estimates, not final 2027 amounts; additional accounting and payroll-service costs are excluded. Calculation notes & official sources .

Planning assumptions Shared basis for both scenarios; the salary change is noted in Scenario 2.
  • Annual gross trading profit: $200,000, before the salary and payments shown below.
  • Eileen’s S-Corp salary: $50,000 per year, paid from that $200,000.
  • Trading treatment: qualifying TTS with a timely, valid §475(f) mark-to-market election; covered securities gains are ordinary business income.
  • Federal QBI deduction: included for eligible §475 business income; Eileen’s salary is excluded. The taxable-income limit is applied.
  • Year-end adjustments: $0 additional unrealized gain or loss; no accounting-method transition adjustments or loss carryforwards. Total trading profit remains $200,000.
  • Roth IRAs: $8,600 per spouse, $17,200 combined in the S-Corp case; $0 in the individual-TTS case because there is no other eligible compensation.
  • Household: California residents, married filing jointly; no other household income.
  • Ages: both spouses age 50+; Kevin age 65+; Eileen under age 65.
  • S-Corp distributions: 100% of remaining profit distributed; passed-through income included on the joint return.
  • Company/payroll model: standard 1.5% California S-Corp rate with the regular $800 minimum (no first-year waiver modeled); California SDI included; $147 estimated annual FUTA.
  • Unspecified costs: no additional health premiums, loan interest, home-office, operating or corporate-administration costs modeled.
  • Estimate basis: 2026 federal/payroll rules and California’s 2025 personal-tax figures, used as a planning proxy—not finalized 2027 liabilities.

Scenario 1

Eileen’s salary: $50,000

Factor Individual TTS S-Corp
1. Annual gross trading profit $200,000 $200,000
2. Cash take home After taxes, payments and Roth IRA contributions $171,905 $144,851
3. Difference Annual gross profit minus cash take home $28,095 $55,149
4. Taxes paid Income taxes after QBI deduction · Group A $28,095 $29,257
5. IRA Roth deposits — Eileen + Kevin combined $0 $17,200
Where is the DIFFERENCE is coming from?
Factor Individual TTS S-Corp
A. Income taxes Household + company
Federal income tax — joint return After §199A QBI deduction $18,138 $17,505
California income tax — joint return $9,957 $9,565
California corporate income/franchise tax — company $0 $2,187
Total A — Income taxes $28,095 $29,257
B. IRA Roth IRA deposits — personal retirement savings
Roth IRA deposits — Eileen + Kevin combined $0 $17,200
Total B — IRA $0 $17,200
C. Social Security Social Security + other payroll contributions; employee and employer amounts included.
Social Security contributions Employee + employer combined $0 $6,200
Medicare contributions Employee + employer combined $0 $1,450
California disability insurance — employee $0 $650
California unemployment insurance — company $0 $238
California employment training — company $0 $7
Federal unemployment tax — company Estimated; not a finalized 2027 amount $0 $147
Total C — Social Security and other payroll contributions $0 $8,692
TOTAL A + B + C $28,095 $55,149
Scenario 2 Eileen’s salary: $100,000 Only the salary changes · Six-row summary

The same planning assumptions as Scenario 1, except Eileen’s salary: $100,000.

Factor Individual TTS S-Corp
1. Annual gross trading profit $200,000 $200,000
2. Cash take home After taxes, payments and Roth IRA contributions $171,905 $136,086
3. Difference Annual gross profit minus cash take home $28,095 $63,914
4. Taxes paid Income taxes after QBI deduction · Group A $28,095 $29,722
5. IRA Roth deposits — Eileen + Kevin combined $0 $17,200
Estimate notes & official sources

§475 and the QBI deduction. Eligible ordinary §475 trading gains can qualify for §199A; capital gains do not. The model applies the smaller of 20% of net qualifying business income and 20% of household taxable income before QBI. Wages are excluded from QBI. Both scenarios are below the 2026 married-filing-jointly $403,500 specified-service threshold. The deduction is taken on the joint return, not by the S-Corp, and is not an extra cash outflow. Treasury/IRS final QBI regulations ; IRS QBI calculation ; IRS 2026 thresholds .

Federal deduction check — rounded dollars.

  • Individual TTS: $163,150 taxable income before QBI; $32,630 QBI deduction; $130,520 after QBI; $18,138 federal income tax.
  • S-Corp, $50,000 salary: $143,596 net business QBI; $28,719 QBI deduction; $127,643 household taxable income after QBI; $17,505 federal income tax.
  • S-Corp, $100,000 salary: $90,579 net business QBI; $18,116 QBI deduction; $135,048 household taxable income after QBI; $19,134 federal income tax.

Figures are calculated before rounding; totals add the displayed, whole-dollar tax amounts.

California and year-end timing. California does not allow the federal QBI deduction; its modeled personal and company income taxes therefore stay unchanged. The $200,000 baseline has no additional unrealized year-end gain. Actual open-position gains or losses must be included under §475, with corresponding basis adjustments; they are not taxed twice. FTB QBI nonconformity ; IRS trader and mark-to-market rules .

Income taxes. Federal calculations use 2026 married-filing-jointly brackets, a $33,850 standard deduction including one age-65 addition, and the income-adjusted enhanced senior deduction. California uses its 2026 estimated-tax instructions with 2025 personal brackets, a $11,412 standard deduction and $459 combined personal/senior credits. For planning, the calculations use rate formulas rather than tax-table lookup bands; amounts are rounded to whole dollars. IRS federal figures ; IRS senior deduction ; California estimate instructions ; California tax figures .

Company + household, counted once. Federal corporate income tax is $0 under the modeled S-Corp assumptions. The salary is paid from each scenario’s gross trading profit, not added on top. Employer contributions and the modeled California company tax reduce federal passed-through income; that company income tax is added back for California personal-tax purposes. The joint return includes both salary and passed-through income. Cash distributions are not treated as a second taxable qualified dividend. The standard 1.5% California S-Corp rate and regular $800 minimum are assumed; financial-corporation classification and any optional pass-through entity tax election require separate review. IRS S-Corporation treatment ; FTB company tax .

Payroll amounts. Social Security uses 6.2% from the employee plus 6.2% from the employer. Medicare uses 1.45% from each. The model includes California SDI at 1.3%, new-employer unemployment at 3.4% on the first $7,000, and employment training at 0.1% on the first $7,000. No elective SDI exclusion is modeled. IRS payroll rates ; EDD contribution rates .

Federal unemployment estimate. The $147 allowance uses $7,000 × 2.1%: the usual 0.6% net rate plus an assumed 1.5% California credit reduction, with no additional surcharge. It remains an assumption, not a finalized 2027 charge. Annual credit reductions depend on federal-loan conditions and the November 10 deadline. Department of Labor explanation .

IRA savings and public-program contributions. The $8,600 per-spouse amounts use 2026 age-50+ limits; the modeled household income is below the Roth contribution phaseout. Eileen’s wages support both spouses’ contributions; trading gains alone do not provide eligible IRA compensation. Roth deposits are not deductible. Group B contains only the Roth IRA deposits. Group C is labeled “Social Security” for this comparison and includes Social Security, Medicare, disability, unemployment and training contributions. These public-program contributions are not balances in your personal retirement accounts. IRS IRA limits ; IRS spousal rules ; SSA trust-fund explanation ; IRS securities-trader rules .

Additional S-Corp filings. A wage-paying S-Corp generally files quarterly federal payroll returns (Form 941), annual corporate returns (Form 1120-S and California Form 100S), and year-end wage and shareholder statements (W-2s and K-1s), with applicable California payroll reporting. These filings are separate from the shareholders’ joint personal return. Payroll processing and corporate bookkeeping also require administration; no service-provider fees are included in the figures. IRS quarterly payroll reporting ; IRS annual S-Corp return and K-1s ; IRS S-Corp filing requirements ; FTB corporate return requirements .

Scope. These are planning illustrations, not final 2027 liabilities or a determination of reasonable compensation. No unprovided insurance, loan, home-office, operating or additional corporate-administration costs are included. Scenario 2 changes only the salary from Scenario 1. IRS compensation guidance .