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Should You Form
an S-Corporation?

Calculate your exact self-employment tax savings. Most self-employed people making over $60,000/year save money with an S-Corp.

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Quick Example: The S-Corp Advantage

As LLC / Sole Proprietor

Net profit:$150,000
Self-employment tax (15.3%):-$22,950
After SE tax:$127,050

As S-Corporation

W-2 salary:$80,000
Payroll tax (15.3%):-$12,240
S-Corp distribution (tax-free):+$70,000
After taxes:$137,760
Annual Tax Savings
$10,710

Plus: Avoid $750/year in extra Medicare tax

The Self-Employment Tax Problem

As a sole proprietor or LLC, you pay 15.3% self-employment tax on ALL your profit.

Double Taxation

You pay both the employer (7.65%) AND employee (7.65%) portions of Social Security and Medicare taxes.

No Salary Limit

Every dollar of profit is subject to 15.3% SE tax, up to $168,600 (2024), then 2.9% Medicare tax continues forever.

Scales with Income

The more successful you become, the more you lose to SE tax. Making $200k? That's $30,600 in SE tax alone.

THE SOLUTION

How S-Corps Save You Money

Split your income into W-2 salary (subject to payroll tax) and distributions (not subject to SE tax).

Step 1: Pay Yourself a Reasonable Salary

The IRS requires you to pay yourself a "reasonable salary" for the work you do. This is subject to normal payroll taxes (15.3%).

Example: If you make $150k and industry standard salary is $80k, pay yourself $80k as W-2 wages.

Step 2: Take the Rest as Distributions

Any remaining profit can be distributed to you as an owner distribution. This is NOT subject to self-employment tax—you only pay income tax.

Example: The remaining $70k is distributed to you. You save 15.3% SE tax on this amount = $10,710 savings.

The Result: Massive Tax Savings
  • Save $8,000-$15,000/year on self-employment taxes
  • Avoid extra 0.9% Medicare tax on high earnings
  • Write off more business expenses
  • Deduct health insurance premiums pre-tax

When Should You Form an S-Corp?

✅ Form an S-Corp If:
  • You're making $60,000+ in net profit
  • Your business is stable and profitable
  • You can afford $2,000-$3,000/year in extra accounting costs
  • You want to maximize retirement contributions
  • You're planning to keep the business long-term
❌ Stay LLC/Sole Prop If:
  • You're making under $60,000 in net profit
  • Your income is highly variable or unpredictable
  • You're in your first year of business
  • You can't afford a CPA and payroll service
  • You want to keep things simple

Frequently Asked Questions

What's a 'reasonable salary' for S-Corp owners?

The IRS requires you to pay yourself what someone would earn doing your job in your industry and location. For most consultants, this is $60,000-$120,000 depending on experience and field. Industry salary data (BLS.gov) is a good benchmark.

What are the extra costs of running an S-Corp?

Expect to pay $2,000-$3,000/year for: CPA ($1,500-$2,500), payroll service ($500-$1,000), state filing fees ($200-$800). These costs are worth it once you're saving $8,000+ in taxes.

Can I convert my existing LLC to an S-Corp?

Yes! You file Form 2553 with the IRS to elect S-Corp tax treatment. Your LLC remains an LLC for state purposes, but is taxed as an S-Corp federally. This is the most common approach.

Do I need to do payroll if I'm the only employee?

Yes. You must run regular payroll (usually monthly or quarterly) to pay yourself a W-2 salary. Most people use Gusto, QuickBooks Payroll, or similar services ($40-$100/month).

What if I pay myself too low of a salary?

The IRS can reclassify your distributions as salary and charge you back taxes, penalties, and interest. Always pay yourself at least industry standard to be safe. Our calculator shows recommended salary ranges.

Can I still deduct business expenses as an S-Corp?

Yes! All your normal business deductions still apply. Plus, you can deduct health insurance premiums pre-tax (not available to sole proprietors), and you may qualify for additional fringe benefits.

Find Out If S-Corp is Right for You

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