What exactly is an
S Corp?
An S Corporation (S Corp) isn't actually a type of business entity—it's a tax election you make with the IRS.
The Self-Employment Tax Trap
When you form an LLC, the IRS automatically taxes you as a Sole Proprietorship (if you're the only owner) or a Partnership (if there are multiple owners). This means all of your business profit passes through to your personal tax return, where it's subject to both income tax AND self-employment tax (15.3% for Social Security and Medicare).
As your business grows, that 15.3% self-employment tax becomes a massive burden. If you net $150,000, you're paying over $21,000 in self-employment taxes alone, before you even calculate your regular income tax.
How the S Corp Election Solves This
When you elect to be taxed as an S Corp, you change how the IRS views your income. Instead of all your profit being subject to self-employment tax, you divide your profit into two buckets:
Your W-2 Salary
As an S Corp owner, you must pay yourself a 'reasonable salary' through payroll. This salary is subject to the 15.3% payroll taxes (the equivalent of self-employment tax).
Owner Distributions
The remaining profit after your salary is taken as a distribution. This money still passes through to your personal tax return for regular income tax, but it is completely free from the 15.3% self-employment tax.
A Quick Example
Let's say your business nets $150,000.
Without S Corp
You pay 15.3% SE tax on the full $150k (approx. $21,194).
With S Corp
You set a reasonable salary of $52,500. You pay 15.3% on the $52.5k (approx. $8,033). The remaining $97,500 is taken as a distribution, free of SE tax.
Estimated Savings: ~$13,161 per year.
When should you elect S Corp status?
Generally, the S Corp election starts making sense when your business is netting $50,000 or more per year. Below that threshold, the administrative costs of running an S Corp (payroll processing fees, separate corporate tax return filing fees) often outweigh the tax savings.
Ready to see if an S Corp is right for you?
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