What Is an S-Corporation?
An S-Corporation (S-Corp) is a tax election — not a business entity type. It allows a corporation or LLC to be taxed as a pass-through entity, meaning business income passes to the owner's personal tax return rather than being taxed at the corporate level.
The key tax advantage: S-Corp owners who actively work in the business only pay self-employment (FICA) taxes on their "reasonable salary" — not on all of the business profits.
How S-Corp Saves You Money
As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on all net profits. With an S-Corp, only your salary is subject to payroll taxes. Remaining profits are distributed to you tax-free from a self-employment standpoint.
Example
Net profit: $100,000
- Sole proprietor: ~$14,130 in SE tax on full $100k
- S-Corp with $60k salary: SE taxes apply only to $60k — potential savings of $6,000+/year
Note: Results vary based on income level, reasonable compensation requirements, and state rules. Consult with us before making a decision.
S-Corp Requirements & Considerations
- You must pay yourself a "reasonable salary" for services rendered
- Requires filing a separate S-Corp tax return (Form 1120-S) — additional tax prep cost
- Must run payroll and pay employer/employee payroll taxes
- Typically makes sense at net profits of $40,000+ per year
- Some states have additional fees or franchise taxes for S-Corps
Curious If an S-Corp Is Right for You?
It depends on your income level, business structure, and goals. Let's run the numbers together.
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