Cabinet Installation Business Entity: S Corporation or Schedule C When Materials Are Half of Revenue

Cabinet installers hear the S-corporation pitch on gross numbers and decide on net ones, or should. The structures (the LLC cost guide): a sole proprietorship or single-member LLC on Schedule C — all net profit subject to self-employment tax (15.3% on 92.35% of profit up to the wage base, 2.9% above), no payroll for the owner, one return; an LLC electing S corporation status — a reasonable salary through payroll (subject to the same combined 15.3% as employer and employee payroll taxes), the remaining profit distributed free of payroll tax, at the cost of Form 1120-S, the payroll system (which a shop with employees already runs — a point in the election's favor for shops with staff), shareholder-basis tracking, and the state's S corporation layer; a partnership for co-owners; and the C corporation, rarely right at this scale. The materials distortion: a shop grossing US$600,000 with US$300,000 of materials, US$120,000 of payroll and subcontractors, and US$60,000 of overhead nets US$120,000 — and the S election's arithmetic runs on the US$120,000, not the US$600,000; the shop owner who thinks of the business as "a US$600,000 company" and expects six-figure payroll-tax savings is computing on the wrong line. The reasonable-salary question for a cabinetmaker-owner: the IRS expects the owner to be paid what a comparable employee would earn for the services performed — and a cabinet shop owner performs several roles (cabinetmaker, installer, estimator, shop manager, salesperson), so the market comparison is to a working shop manager or lead cabinetmaker in the local market, adjusted for hours and management — a figure that for most owner-operators lands in the US$55,000-to-US$85,000 range depending on the market and the shop's size; a salary set at half that to maximize distributions is the audit issue, and the salary is documented (market data, hours, roles) and revisited annually. The saving: payroll tax avoided on the distribution portion — profit above salary — so the US$120,000 shop with a US$70,000 salary saves payroll tax on US$50,000 (roughly US$7,000 before the election's costs); a US$75,000 shop with a US$65,000 salary saves payroll tax on US$10,000 (about US$1,500 — less than the election costs). The election's costs: the 1120-S (several times a Schedule C's increment), the payroll system's incremental cost for adding the owner (small if the shop already runs payroll for employees — the reason shops with staff cross the threshold sooner than solo installers), shareholder-basis tracking, the state layer (states that tax S corporations at the entity level or impose franchise fees), and the administration. The qualified business income deduction: cabinet installation is not a specified service trade, so the 20% deduction applies at all income levels subject to the wage-and-property limitation — which a shop with payroll and equipment satisfies easily — and the S election's effect on it is the standard one (the salary leaves the QBI base, costing 20% of the salary in deduction, while the W-2 wages support the limitation for higher-income owners); for most shops the payroll-tax saving outweighs the QBI cost above the profit threshold. The equipment-year wrinkle: a shop that expenses a US$70,000 CNC router under bonus depreciation (the deductions guide) may show little profit that year — an S election made in an equipment year computes its saving on a depressed profit and may look worse than it is; the analysis runs on normalized profit (the shop's typical year), and the election's timing can wait for the year after the write-off. The seasonal wrinkle: cabinet work follows the renovation cycle (spring and fall peaks, a January trough) — milder than a boat detailer's season (the detailing entity guide) but real enough that the owner's salary schedule is set to be fundable through the trough, or paid as a steady base with a season-end bonus. The profit bands: net profit under about US$80,000 — Schedule C (the distribution portion is too small); US$80,000 to US$130,000 — run the worksheet (the answer turns on the salary the market supports and whether payroll already exists for staff); above US$130,000 with staff on payroll — the election usually wins, and the analysis is about the salary level and the state layer. Co-owners: two partners in a cabinet shop face two salaries against the shared profit, and the partnership's self-employment tax on both shares is the comparison; the S election with two shareholders adds two W-2s to the payroll. Liability: the LLC protects the owners from the business's liabilities (a kitchen ruined by a water line hit during install; an injury in the shop) whether or not the S election is made — the insurance carries the rest, and the entity decision is separate from the liability decision. The annual re-run: profit changes with the renovation market and the equipment cycle, thresholds index, and the election is revisited on the numbers in January rather than assumed from the marina — or the lumberyard.

Key takeaways

• Run the arithmetic on net profit, not sales: materials at 40–60% of revenue make a "US$600,000 shop" a US$120,000 profit business, and the S election's saving is on profit above a reasonable salary.
• Reasonable salary for a cabinetmaker-owner is a working shop manager or lead cabinetmaker's market wage adjusted for management — typically mid five figures — documented and revisited; a salary set low to maximize distributions is the audit issue.
• The election's incremental cost is small for shops already running payroll for staff — the reason shops with employees cross the threshold sooner than solo installers.
• Not a specified service trade: the QBI deduction applies at all income levels with the wage-and-property limitation easily met; the election's QBI cost (20% of the salary) is outweighed above the threshold.
• Normalize for equipment years and plan for the renovation cycle: compute the saving on a typical year's profit, and set a salary schedule the January trough can fund.
• Profit bands: under US$80,000 — Schedule C; US$80,000–130,000 — the worksheet; above US$130,000 with staff — usually elect.

The cabinet shop's entity worksheet

Normalized net profit (a typical year, equipment write-offs smoothed). Reasonable salary (market data for a working shop manager or lead cabinetmaker). Distribution portion. Payroll tax saved. Election costs (1120-S, incremental payroll, basis tracking, state layer). QBI under each structure. Seasonal salary schedule feasibility. Net result. Fifteen minutes in January; re-run every year.

Worked example

Two cabinet businesses. Business one: a solo installer who buys cabinets from a manufacturer and installs them — US$280,000 of revenue, US$150,000 of cabinet cost, US$30,000 of overhead and van costs, US$100,000 of profit, no employees. Reasonable salary for a lead installer in his market: about US$60,000. Distribution portion: US$40,000; payroll tax saved: about US$5,800. Election costs: the 1120-S, a payroll system for one (he has none today), the state's annual S corporation fee, basis tracking — several thousand dollars. Net: marginally positive, and the complexity of running a payroll for himself through a January with no installs makes him wait a year; he stays on Schedule C, takes the full QBI deduction, and re-runs it next January. Business two: a shop with two employees, a rented space, US$640,000 of revenue, US$310,000 of materials, US$95,000 of employee payroll, US$70,000 of overhead — US$165,000 of profit in a normal year (this year's CNC purchase depressed it to US$95,000, so the worksheet uses the normalized US$165,000). Reasonable salary for a working shop manager: about US$78,000. Distribution portion: US$87,000; payroll tax saved: about US$12,000. Election costs: the 1120-S and the small incremental cost of adding the owner to a payroll already running for two employees — a few thousand. QBI: the salary leaves the base, but the W-2 wages already satisfied the limitation; net QBI cost modest. Net saving: high four figures annually. He elects, effective the year after the CNC write-off, with a steady US$5,000 monthly salary funded through the trough from a reserve built in the spring peak and a US$18,000 fall bonus. Same trade, and the second shop's existing payroll and larger distribution portion are what made the election pay.

Official sources

The IRS states that "S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes." Shareholder-employees who perform services must be paid reasonable compensation as wages before distributions, and the election is made on Form 2553. — Internal Revenue Service, S corporations, https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

The IRS states that "the deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income," subject to limitations that depend on taxable income and the type of trade or business. — Internal Revenue Service, Qualified business income deduction, https://www.irs.gov/newsroom/qualified-business-income-deduction

Practitioner note

The cabinet installer's S election is decided on net profit that materials cut in half, and on a reasonable salary that a working shop manager's market wage sets — which leaves a distribution portion smaller than the gross revenue suggests. Our worksheet normalizes for equipment years, counts the incremental payroll cost honestly (small for shops with staff, real for solo installers), and adds the renovation-cycle salary schedule — because an election that can't fund January's payroll is a spreadsheet, not a structure.

See also: For related guidance, see setting up a cabinet shop's deductions; and browse every small business tax guide, by situation.

Next step

Fairlight handles entity structure for cabinet and millwork businesses — the S election worksheet on normalized profit with reasonable-compensation documentation, payroll integration for shops with staff, QBI computation, and the seasonal salary schedule. See pricing or book a call.