Why Are You Paying Self-Employment Taxes? The S-Corp Advantage When Revenues Climb
- jeter795
- 11 hours ago
- 3 min read
As a self-employed individual or small business owner, you're likely familiar with the sting of self-employment taxes. This hefty 15.3% tax covers both the employee and employer portions of Social Security and Medicare, and it's calculated on your entire business profit. But what if there was a way to significantly reduce that tax burden, freeing up more of your hard-earned revenue? For businesses exceeding $100,000 in revenue, the S-Corp election often presents a powerful tax-saving solution.
The Self-Employment Tax Pinch: 15.3% on $150,000
Imagine you're a self-employed professional with a thriving business, generating $150,000 in revenue. As a sole proprietor or single-member LLC taxed as a sole proprietorship, you're looking at a significant self-employment tax bill. At a 15.3% rate, you'd be paying roughly $23,000 in Social Security and Medicare taxes on that $150,000. This tax is in addition to your income tax, and it can feel like a substantial drain on your business's cash flow.
The S-Corp Solution: A Reasonable Salary and Tax-Free Distributions
Enter the S-Corp. By electing S-Corp status for your business, you can pay yourself a "reasonable salary" as an employee and take the remaining profits as distributions. Here's where the tax savings come into play:
Only the salary is subject to self-employment (FICA) taxes. You determine a reasonable salary for yourself based on factors like your industry, experience, and duties. Let's say you determine a reasonable salary of $30,000. Now, instead of paying 15.3% on $150,000, you only pay the 15.3% FICA tax on that $30,000 salary, resulting in a much lower payroll tax bill. The employer portion of the FICA tax paid by your S-Corp is deductible as a business expense, further reducing your company's taxable income.
The remaining profits can be taken as tax-free distributions. After paying yourself a reasonable salary and accounting for business expenses, any remaining profits can be taken as distributions to yourself as a shareholder. These distributions are generally not subject to self-employment taxes, providing a significant tax advantage. However, it's critical to ensure you have a sufficient stock basis in your S-Corp to receive these distributions tax-free.
The Calculation:
Let's revisit the $150,000 revenue example. If you elect S-Corp status and take a $30,000 reasonable salary, your payroll taxes would be calculated on $30,000 instead of $150,000. This could lead to significant savings compared to paying self-employment tax on the entire $150,000.
Beyond Tax Savings: Other S-Corp Benefits
While self-employment tax savings are a major draw, S-Corps offer other advantages, including:
Limited liability protection: Like an LLC, an S-Corp can protect your personal assets from business liabilities.
Pass-through taxation: S-Corps avoid double taxation, meaning income is taxed only at the individual level, not at the corporate level.
Increased credibility: Operating as an S-Corp can enhance your business's image and credibility.
Important Considerations:
Reasonable salary: The IRS requires you to pay yourself a reasonable salary, so you can't simply pay yourself a token amount and take the rest as distributions.
Complexity: S-Corps involve more complex filing requirements and ongoing compliance compared to sole proprietorships or standard LLCs.
Consult a tax professional: It's essential to consult with a qualified tax professional or CPA to determine if an S-Corp is the right business structure for your specific situation and to ensure you are meeting all compliance requirements.

Conclusion:
If your business is exceeding $100,000 in revenue, exploring the S-Corp option could significantly reduce your self-employment tax burden and offer other valuable benefits. By strategically structuring your income and seeking professional guidance, you can potentially keep more of your profits and build a stronger financial foundation for your business.
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