Choosing your business entity type

When you set your entity type in Settings → Business, three things change inside ReservWise:

1. Your default tax reserve rate.
2. How owner draws are categorized.
3. Which quarterly estimator formula runs.

You can change the entity setting later — it doesn't break historical data — but the tax reserve rate only re-applies to future income events, not past ones.

Sole proprietor

The default for most freelancers and consultants who never bothered to file paperwork. Income flows on Schedule C of your personal return. Self-employment tax (~15.3%) applies on top of regular income tax.

What ReservWise does: sets the default tax reserve rate to your federal bracket plus 15.3% SE tax plus your state rate. For a typical solo earner in California, that lands around 32–38%.

Owner draws: there's no formal draw — money you take is just yours. ReservWise still tracks "draws" so you can see what you actually paid yourself versus what you reinvested.

Single-member LLC (disregarded entity)

For tax purposes, identical to sole proprietor — IRS treats a single-member LLC as a disregarded entity by default. Schedule C, SE tax, the works.

What ReservWise does: same math as sole prop, unless you've made an S-corp election (see below). The difference is legal liability protection, which doesn't change ReservWise's calculations.

Multi-member LLC (partnership)

Files Form 1065. Income flows to members on K-1s. Still SE tax on most distributions.

What ReservWise does: tracks your share of distributions only, based on the ownership percent you set in Settings → Business. Tax reserve uses the same SE-tax-inclusive rate.

S-corp election (LLC or corporation)

The big one. You pay yourself a "reasonable salary" via W-2 (subject to payroll taxes), and remaining profit comes out as distributions (no SE tax). Done right, this saves real money. Done wrong, the IRS notices.

What ReservWise does:

• Splits incoming revenue into two streams: salary (W-2) and distributions.
• Tax reserve drops on the distribution portion (no SE tax) but applies fully to the salary portion.
• Owner draws are categorized as distributions, not salary — salary should be coming through payroll.
• Quarterly estimator uses the S-corp formula. The numbers come in lower; that's correct.

You'll need to enter your reasonable-salary target in Settings → Business → Salary for any of this to work. The default is 40% of revenue, which is wrong for most people; consult your CPA.

C-corp

Less common for solo operators. Corporate-level tax + personal-level tax on dividends. Usually only makes sense at scale or with specific investor requirements.

What ReservWise does: tracks corporate income separately from owner compensation. Tax reserve runs at the corporate rate (currently 21% federal). We do not project personal dividend tax — that's between you and your accountant.

Changing your entity type later

Open Settings → Business → Entity type, pick the new one, save. ReservWise will:

• Recompute tax reserve targets going forward.
• Leave historical income events untouched (rates locked at time of receipt).
• Flag a "review your tax reserve" alert in your next monthly summary.

If you make a real-world entity change mid-year (e.g., S-corp election effective Jan 1), set the change date manually so reporting splits cleanly.

What to do next

• Read Taxes & Buckets to understand how the reserve auto-fill uses these rates.
• Read Owner Draws if you've elected S-corp — the salary/distribution split changes how draws work.
• If you're not sure which one to pick, default to whatever your CPA tells you. If you don't have a CPA and you're earning more than ~$60K self-employed, get one.

The cheapest tax strategy is the one your CPA actually understands and you can actually defend. ReservWise gives you the numbers; the choice is still yours.