April 5, 2022

S-Corporations are an ESSENTIAL structure when it comes to business taxes. Here’s why:

Let’s say you’re making $100k/year in normal business income. If you’re not using an S-Corporation, you’re paying your federal income tax, state and local income tax, and both sides of the FICA tax. Normally, as a W-2 employee, you’ll split the 15.3% FICA tax with your employer (7.65% each). If you’re self-employed, you’re responsible for both sides of that FICA tax. Do some quick math, and you’re paying roughly $15k per year on that $100k income.

So how does an S-Corporation play into that? If you set up your S-Corp, you’ll have to pay yourself a “reasonable salary”. That varies by industry, but let’s say it’s $40k per year. You’ll still pay all the normal taxes on that, but the other $60k is taxed differently. By taking that remaining $60k as an owner’s distribution, you’re bypassing the FICA tax. Let’s do some quick math again ($60,000 x .153 = $9180).

So on $100k of business income, you’re saving almost TEN GRAND in taxes.

**As always, be sure to talk to your CPA or financial advisor before making any moves. My advice isn’t a one-size-fits-all solution, so make sure you find a strategy that fits your specific financial situation.