Cut Your Self-Employment Tax With an S Corp

Key Takeaways

• Switching to an S Corp can save owners with over $60,000 in profit thousands of dollars by exempting distributions from self-employment tax.
• You must pay yourself a 'reasonable salary' through a formal payroll system to satisfy IRS requirements.
• The deadline to file Form 2553 for an existing business is generally March 15th to count for the current tax year.
• Failing to document your salary choice can lead to the IRS reclassifying all your profits as wages, triggering back taxes and penalties.

1. Check your total annual profit. If it's under $50,000, the extra accounting costs usually wipe out your tax savings.
2. Run a payroll report to see what you actually paid yourself last month compared to what a manager in your field earns.
3. Search the IRS website for Form 2553 (Election by a Small Business Corporation) to see the basic filing requirements.

Small Biz Trends recently highlighted how an S Corp functions as a tax designation rather than a separate legal entity like a traditional corporation. For a solo plumber or a 5-person print shop, this distinction is the difference between writing a $20,000 check to the IRS and a $12,000 one. When you operate as a standard LLC (Limited Liability Company), you pay self-employment tax on every single penny you earn. That tax is currently 15.3%. By electing S Corp status, you only pay that 15.3% on the salary you take, not the leftover profit.

The Reasonable Salary Rule

You cannot just pay yourself $1 a year and take the rest tax-free. The IRS requires you to pay a 'reasonable' wage. If you run a marketing agency and pay yourself $20,000 while the business nets $200,000, you're begging for an audit. Look at what similar roles pay in your city. If a project manager earns $70,000, that's your baseline. The money you take above that $70,000 is a distribution. You still pay income tax on it, but you dodge that 15.3% self-employment hit.

This setup creates a new chore: payroll. You can no longer just transfer money from your business checking to your personal account whenever you want. You need to withhold federal income tax and Social Security. Most owners use a service like Gusto or QuickBooks to handle this. It costs about $40 to $80 a month, which is a small price to pay if you're saving $5,000 in taxes. (Disclosure: we may earn a commission if you sign up through our links.)

Costs vs Savings

Business Profit	Estimated Self-Employment Tax (LLC)	Estimated Tax (S Corp w/ 50% Salary)
$60,000	$9,180	$4,590
$100,000	$15,300	$7,650
$150,000	$22,950	$11,475

gov/business-guide/launch-your-business/choose-business-structure) guidelines on business structures.

An S Corp requires you to file a separate tax return (Form 1120-S) every year. A tax pro might charge you $800 to $1,500 just for that one form. If your savings are only $2,000, you might decide the extra paperwork isn't worth the headache.

I once saw a graphic designer in Ohio get hit with a $4,000 penalty because they forgot to file their S Corp return on time. The deadline is March 15th, not April 15th. Mark that on your calendar in red ink. If you miss it, you might lose your S Corp status for the year. That mistake hurts because it forces you back into the high-tax LLC bracket.

Talk to a CPA before you sign anything.

Related free tool

LLC vs. S-Corp Savings Calculator — See if an S-corp election would pay off for you. Free, no signup to start.

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📋 Disclaimer

This article is for informational purposes only and does not constitute legal, tax, financial, or professional advice. Laws and regulations change frequently, and the information presented may not reflect the most current legal developments. Always consult with a qualified professional (CPA, attorney, financial advisor) before making business decisions based on this content. MyBizNerd may receive compensation through affiliate links, but this never influences our recommendations.

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