Business Tax Strategy
Tax · S-Corp Strategy
The S-Corp Strategy —
Stop Paying Tax on Your Own Money
If you're a self-employed business owner making over $80K in profit and still operating as a sole prop or single-member LLC, you're likely overpaying self-employment tax by $8,000-$20,000+ every year. The S-Corp election fixes that.
Self-employment tax you pay on EVERY dollar of sole-prop profit
An S-Corp lets you split that profit into salary (subject to SE tax) and distributions (NOT subject to SE tax). On a $150K profit, splitting $70K salary and $80K distributions saves roughly $12K in SE tax — every year.
How the strategy works
Step 1: Form an LLC, then file Form 2553 to elect S-Corp tax treatment (or form an S-Corp directly).
Step 2: Set up payroll. You become a W-2 employee of your own company.
Step 3: Pay yourself a "reasonable salary" — what someone would charge to do your job. You pay all the usual employment taxes on this salary.
Step 4: The REMAINING profit comes to you as distributions. These are NOT subject to the 15.3% self-employment tax.
Result: Massive SE tax savings on every dollar above your salary.
The "reasonable salary" question
The IRS requires you to pay yourself a salary similar to what an outside employee doing your work would earn. Pay yourself too little, and the IRS can recharacterize distributions as salary (with penalties). Pay yourself too much, and you lose savings.
Common approaches: 40-60% of net profit (most defensible for service businesses), industry benchmarks via tools like RC Reports, or matched to comparable W-2 salary data in your area for your role.
The compliance trade-off
S-Corp comes with payroll filings, an additional return (Form 1120-S), reasonable salary documentation, and more bookkeeping. Costs run $1,500-$3,500/year in extra compliance. For most $80K+ owners, the SE tax savings are 4-10x that cost. Below ~$60K profit, the savings often don't justify the complexity.
Calculate your S-Corp savings
We'll model your sole prop / LLC vs S-Corp scenario — net of payroll costs and extra compliance — and show you the real annual savings.
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Sources
Educational content only. Always consult a licensed CPA before S-Corp election.