CrossFit Gym Owners: Why Choosing Sole Prop or S-Corp Impacts Your Taxes

Many CrossFit gym owners start their business as sole proprietors because it’s simple and fast to set up. But as your gym grows and becomes profitable, the way you structure your business can have a big impact on how much tax you pay. Choosing between a sole proprietorship and an S-Corporation (S-Corp) is one of the most important decisions you will make for your gym’s financial health.

This post explains the key differences between these two business structures and why switching to an S-Corp could save you thousands in taxes each year.

What Happens When You Operate as a Sole Proprietor

When you run your gym as a sole proprietor, the IRS treats all the profits as your personal income. This means:

• Your entire profit is subject to self-employment tax, which covers Social Security and Medicare.

• You also pay regular income tax on the same amount.

• There is no distinction between your salary and business profit.

  
  

For example, if your gym earns $100,000 in profit, the IRS considers that your paycheck. You pay self-employment tax on the full $100,000, which can add up to roughly 15.3% in taxes on top of income tax.

This tax structure is simple but can become expensive as your profits grow. The more money your gym makes, the more you pay in self-employment taxes.

How an S-Corp Changes Your Tax Situation

An S-Corp offers a different way to handle your income and taxes. Here’s how it works:

• You pay yourself a reasonable salary for the work you do, such as coaching and managing the gym.

• This salary is subject to payroll taxes (Social Security and Medicare).

• Any remaining profit after salary can be taken as distributions, which are not subject to payroll taxes.

• You still pay income tax on both salary and distributions, but you save on payroll taxes for the distribution portion.

  
  

This structure is allowed by the tax code and is not a loophole. It rewards business owners who separate their salary from profits.

Example: Comparing Sole Proprietor and S-Corp Taxes on $100,000 Profit

In this example:

• The gym owner pays themselves a $60,000 salary.

• Payroll taxes apply only to the $60,000 salary.

• The remaining $40,000 is taken as distributions, avoiding payroll taxes.

• This results in about $5,000 saved in payroll taxes annually.

  
  

Even after accounting for additional payroll and tax filing costs, many gym owners find the savings worthwhile.

What Makes a Salary “Reasonable”?

The IRS requires that the salary you pay yourself as an S-Corp owner be reasonable for the work you perform. This means:

• Your salary should reflect what someone else would earn doing the same job.

• It should cover your coaching, managing staff, and running daily operations.

• Paying yourself too little can trigger IRS audits and penalties.

  
  

Many gym owners consult accountants or tax professionals to determine a fair salary based on their location, gym size, and responsibilities.

When Should You Consider Switching to an S-Corp?

If your gym is consistently profitable, switching to an S-Corp can reduce your tax burden. Consider these signs:

• Your net profit exceeds $75,000-$100,000 annually.

• You want to reduce self-employment taxes.

• You are ready to handle payroll and additional tax filing requirements.

  
  

Switching too early might not provide enough benefit to cover extra costs, but waiting too long means paying more taxes than necessary.

Additional Benefits and Considerations

Besides tax savings, an S-Corp can offer:

• More credibility with banks and investors.

• Stronger audit defense - historically less likely to get audited

• Clearer financial separation between you and your gym.

  
  

However, S-Corps require:

• Running payroll and withholding taxes.

• Filing additional tax forms, including form 1120S

• Keeping good records of salary and distributions.

  
  

Working with a qualified accountant familiar with CrossFit gyms can help you navigate these requirements smoothly.

Choosing the right business structure affects how much tax you pay and how you manage your gym’s finances. Many CrossFit gym owners start as sole proprietors because it’s easy, but as profits grow, switching to an S-Corp can save thousands in taxes each year.