How to Save $20,000+ Per Year with S-Corp Status
How to Save $20,000+ Per Year with S-Corp Status
S-Corp status lets you pay self-employment tax (15.3%) only on your reasonable salary, not on distributions. For a business making $150,000, this typically saves $10,000-$15,000 annually. At higher income levels ($200,000+), savings can exceed $20,000 per year.
Sarah makes $180,000 as a freelance consultant. Last year, she paid $27,540 in self-employment tax. This year, after electing S-Corp status, she'll pay about $12,000. That's $15,540 in savings. Every year.
Same business. Same income. $15,540 less in taxes. How? The S-Corp loophole.
How Does the S-Corp Tax Savings Work?
Here's the loophole: As a sole proprietor or LLC (default), you pay 15.3% self-employment tax on ALL your business income. As an S-Corp, you only pay FICA taxes (15.3%) on your reasonable salary. The rest is taken as distributions no self-employment tax.
| Income Level | Sole Proprietor Tax | S-Corp Tax | Annual Savings |
|---|---|---|---|
| $100,000 | $15,300 | $7,650 | $7,650 |
| $150,000 | $22,950 | $12,240 | $10,710 |
| $200,000 | $30,600 | $18,360 | $12,240 |
| $250,000 | $38,250 | $24,480 | $13,770 |
Note: Assumes reasonable salary of 50% of income. Actual savings vary based on salary level and income.
Real Example: The $20,000 Savings
Mike is a software consultant making $200,000 per year. Here's his tax breakdown:
As a Sole Proprietor:
- Business income: $200,000
- Self-employment tax (15.3%): $30,600
- Income tax (24%): $48,000
- Total tax: $78,600
As an S-Corp:
- Reasonable salary: $100,000
- FICA taxes (15.3% on salary): $15,300
- Distributions: $100,000 (no self-employment tax)
- Income tax (24% on all $200,000): $48,000
- Total tax: $63,300
Annual savings: $15,300
But Mike also implemented other strategies we'll cover, bringing his total savings to over $20,000.
What Is a "Reasonable Salary"?
The IRS requires S-Corp owners to pay themselves a "reasonable salary" for the work they do. This is the key to the loophole—you want to set your salary as low as legally possible to maximize distributions (which aren't subject to self-employment tax).
What's reasonable? It depends on:
- Your industry and role
- Your experience and qualifications
- Your location
- What similar businesses pay
Generally, reasonable salaries range from 40-60% of total income for service businesses. For a $200,000 business, a reasonable salary might be $80,000-$120,000.
How to Maximize Your S-Corp Savings
To get the maximum savings from S-Corp status:
- Set your salary strategically: Work with a tax professional to determine the minimum reasonable salary for your situation.
- Take distributions throughout the year: Don't wait until year-end—take distributions regularly.
- Document everything: Keep records of how you determined your reasonable salary.
- Stay compliant: File all required forms and maintain proper separation between personal and business finances.
When Does S-Corp Make Sense?
S-Corp status makes the most sense when:
- You're making $75,000+ in profit
- You have no employees (or very few)
- You can justify a reasonable salary that's less than your total income
- You're willing to handle payroll and additional compliance
If you're making less than $75,000, the savings might not justify the added complexity and costs.
Common Questions About S-Corp Savings
How much can I actually save with S-Corp?
Savings depend on your income level and reasonable salary. At $150,000 income, typical savings are $8,000 to $10,000. At $200,000+, savings can exceed $15,000 to $20,000 annually.
Is this legal?
Yes, absolutely. S-Corp status is a legitimate tax election that the IRS encourages. As long as you pay yourself a reasonable salary and follow the rules, this is completely legal.
What if I set my salary too low?
The IRS can reclassify your distributions as salary and hit you with back taxes and penalties. This is why it's important to work with a tax professional to determine a defensible reasonable salary.
Do I still pay income tax on distributions?
Yes, you pay regular income tax on both salary and distributions. The savings is only on self-employment tax (15.3%), not income tax.
The S-Corp loophole isn't for everyone, but if you're making $75,000+ and have no employees, it's worth serious consideration. The savings can be $10,000, $20,000, or even more annually. That's real money that stays in your pocket instead of going to the government.
Sources: IRS: S Corporations, IRS: S Corporation Reasonable Compensation
