S-Corporation Potential Tax Savings

When does it make financial sense for you to file taxes as an S corporation? Here's the math.

Understanding S-Corp Tax Advantages

An S-Corp allows business owners to split income into salary and distributions. Only the salary portion is subject to employment taxes, which can lead to significant tax savings compared to sole proprietorships, where the entire net income is taxed.

Example:

• Sole Proprietor: $160,000 net income taxed entirely at 15.3% self-employment tax = $24,480
• S-Corp Owner: $100,000 salary taxed at 15.3% = $15,300
• Tax Savings: $9,180

Is an S-Corp Right for You?

Consider an S-Corp if:

• Your net income exceeds $40,000 annually.
• You're prepared to handle additional administrative responsibilities.
• You aim to optimize your tax obligations legally.

Potential Drawbacks:

• Increased complexity in setup and maintenance.
• Additional costs for payroll and compliance.
• Requirement to pay yourself a "reasonable salary" as per IRS guidelines.