The S Corporation

What Is an S-Corp?

An S Corporation (S-Corp) is a tax election that can significantly reduce self-employment taxes for profitable business owners.

Unlike an LLC or sole proprietorship—where 100% of profits are subject to the 15.3% self-employment tax—an S-Corp only pays this tax on the owner’s salary. Remaining profits can be taken as distributions, which are not subject to self-employment tax.

The tradeoff?
S-Corps require stricter compliance, including payroll, bookkeeping, and proper reporting.

Who Should Consider an S-Corp?

If your business generates $40,000–$50,000+ in annual net profit, it may be time to consider switching.

Example:

$50,000 Net Profit

• LLC/Sole Prop: 15.3% on $50,000 = $7,650

• S-Corp: $30,000 salary + $20,000 distribution

  • 15.3% on $30,000 = $4,590

• Estimated Savings: $3,060 per year

As profits grow, so do the tax savings.

The Catch: Reasonable Salary Is Required

If you actively work in the business, you must pay yourself a reasonable salary before taking distributions.

The IRS looks at:

• Industry standards

• Your role and responsibilities

• Experience and qualifications

• Business profitability

Underpaying yourself can trigger penalties, back taxes, and audits.

Bookkeeping & Payroll Are Mandatory

Electing S-Corp status means:

✔ Running consistent payroll
✔ Withholding and remitting taxes properly
✔ Maintaining clean, accurate books
✔ Filing Form 2553 on time (generally by March 15)

Poor bookkeeping or skipped payroll can eliminate the tax benefits entirely.

Final Thoughts

An S-Corp can be a powerful tax strategy for growing, profitable businesses. But it must be structured and managed correctly.

If you’re considering an S-Corp election—or need help managing S-Corp bookkeeping and payroll—I’m happy to help ensure everything is set up properly and optimized for tax savings.

Let’s connect.