How Does an S Corp Save Me Taxes?
- S-Corp Guide
- Oct 26
- 6 min read
Updated: Oct 27
If you're a self-employed business owner making decent money, you've probably heard whispers about S Corporations saving taxes. But how exactly does that work? Let's break it down with real examples so you can see the mechanics behind the tax savings.
Understanding LLC Taxation: The Self-Employment Tax Problem
Most small business owners start as either sole proprietors or single-member LLCs. For tax purposes, these are essentially the same thing – they're what we call "pass-through" entities.
What Does Pass-Through Mean?
Pass-through taxation means your business income "passes through" directly to your personal tax return. You don't file a separate tax return for the business entity itself. Instead, you report all business profit on Schedule C of your Form 1040. This sounds straightforwards – and it is. But there's a catch: self-employment tax.
The Self-Employment Tax Burden
When you operate as an LLC (or sole proprietor), you pay self-employment tax on your entire net business income. This tax covers Social Security and Medicare contributions – the same taxes that employees pay through payroll withholding, except you're paying both the employee and employer portions.
The self-employment tax rate is 15.3% (actually 14.13% after a small deduction, but we'll keep it simple). This breaks down to:
12.4% for Social Security
2.9% for Medicare
You pay this Self-Employment tax in addition to your regular income tax. Let's look at an example to help illustrate here.
LLC Taxation Example
Let's say you're a freelance consultant with $150,000 in business net income. Let's dive into what your tax picture looks like:
Business Income: $150,000
Self-Employment Tax: $150,000 × 14.13% = $21,195
Adjusted Gross Income (AGI):
$150,000 (business income)
Minus $10,598 (50% SE tax deduction)
AGI = $139,402
Taxable Income:
$139,402 (AGI)
Minus $15,000 (standard deduction for single filer)
Minus $24,880 (20% QBI deduction)
Taxable Income = $99,522
Federal Income Tax: ~$16,722 (using 2025 brackets)
Total Tax Bill:
Self-Employment Tax: $21,195
Federal Income Tax: $16,809
Total: $38,004
That's a 25.3% effective tax rate on your $150,000 income. The self-employment tax alone caused over $21,000 in tax.
How an S Corporation Saves on Taxes
An S Corporation is also a pass-through entity, but it has one crucial difference: S Corp profits are not subject to self-employment tax.
The S Corp Structure (in short):
When you elect S Corp status, you're required to:
Pay yourself a "reasonable salary" for the work you do
Pay payroll taxes on that salary (just like any employee)
Report remaining net profits as pass-through income on your personal 1040, but S-Corp profits avoid self-employment tax
The key insight: Only your salary is subject to payroll taxes, not your net profits.
What's a "Reasonable Salary"?
The IRS requires S Corp owners to pay themselves a reasonable salary for services they perform. This prevents people from taking $1 salaries and avoiding payroll taxes entirely.
What's reasonable depends on:
Your industry standards
Your specific role and responsibilities
What similar businesses pay for comparable work
Your company's profitability
A common rule of thumb is 30-50% of net income, but this varies significantly by situation.
S Corp Taxation Example
Let's use an example, complete with numbers to further illustrate. We're picking up with the same example as before with an LLC: $150,000 net income scenario, but now as an S Corp.
Scenario: You pay yourself a $75,000 salary, which decreases your net profits to $69,262.
Don't Forget About Employer Payroll Taxes!
When you pay yourself a salary, your S Corp also has to pay the employer portion of payroll taxes (7.65%). This is a real business expense that reduces your net income, let's dive into the numbers on how that works with the following example:
Adjusted Business Income:
$150,000 (gross business income)
Minus $75,000 (your salary)
Minus $5,738 (employer payroll tax @ 7.65% of salary)
Adjusted Business Income = $69,262
Your Payroll Taxes:
Total payroll tax on $75,000 salary: $75,000 × 15.3% = $11,475 (This includes both employee and employer portions)
Save this amount for later on in the calculation
Your Adjusted Gross Income (AGI):
$75,000 (Salary)
Plus $69,262 (S Corp Adjusted Business Income)
AGI = $144,262
Taxable Income:
$144,262 (AGI)
Minus $15,000 (standard deduction)
Minus $13,852 (20% QBI deduction on the $69,262 S Corp Net Profit)
Taxable income= $115,410
Federal Income Tax: ~$20,545 (using 2025 brackets)
Total Tax Bill:
Payroll Tax: $11,475
Federal Income Tax: $20,545
Total Tax: $32,020
The S Corp Savings
Let's compare the two scenarios side by side:
Tax Type | LLC | S-Corp |
Self-Employment Tax | 21,195 | 0 |
Payroll Tax | 0 | 11,475 |
Federal Income Tax | 16,809 | 20,545 |
Total Tax | 38,004 | 32,020 |
The S Corp saves $5,983 annually in this example. Now, that's a lot of math, many variables, multiple steps, and advanced tax code to all keep track of. So - we created our handy 'Savings Calculator' - it shows you exactly how you much you save on taxes with your S Corp vs being an LLC. Just plug in a few numbers, and it will take care of the rest. Head on over, and calculate your own personalized tax savings calculation at the following link: My SCorp Savings Calculator
Why Does This Work?
The savings from an S Corp come from one simple fact: Your S Corp profits avoid the 15.3% self-employment tax.
In the LLC scenario, you paid self-employment tax on the full $150,000 net profit. In the S Corp scenario, you only paid payroll tax on $75,000 (your salary). The $69,262 net profits after salary avoided payroll/self-employment tax entirely.
That's where the tax savings magic happens: $69,262 × 15.3% = approximately $10,597 in payroll taxes avoided. After accounting for the slight increase in income tax (because QBI deduction is lower on S Corp profits vs. full income), you net about $5,983 in savings.
Important Considerations
Your Salary Has to Be Reasonable - You can't just pay yourself $10,000 and take $140,000 as distributions. The IRS will challenge unreasonably low salaries and reclassify your distributions as wages subject to payroll tax, plus penalties.
Additional Costs - Running an S Corp comes with additional overhead expenses
Payroll processing fees for your Salary ($500-$2,000/year)
Additional accounting and tax preparation ($1,000-$3,000/year)
State filing fees and franchise taxes (varies by state)
Factor these costs into your decision. If your savings are only $3,000, the additional compliance costs might eat most of it.
The Savings Scale with Income - the higher your income, the more you save. Someone making $300,000 might save $15,000-$20,000 annually. Someone making $60,000 might only save $2,000-$3,000 (which might not justify the extra complexity).
State Taxes Matter - Some states don't recognize S Corps or impose additional taxes on them. Others, like California, charge an annual $800 franchise tax regardless of profitability. Always consider your specific state's rules.
Should You Elect S Corp Status?
S Corp status typically makes sense when:
Your net business income exceeds $60,000-$80,000
You'll save at least $2,000 annually after accounting for additional costs
You're willing to handle the extra administrative requirements
Your state tax treatment is favorable
It usually doesn't make sense when:
Your income is below $40,000-$50,000
You have significant business losses
Your state imposes punitive S Corp taxes
You prefer simpler tax compliance
Calculate Your Specific Savings
Every situation is different. Your income level, filing status, state tax rate, and reasonable salary determination all affect your potential savings.
Rather than trying to work through these calculations manually, use our S Corp Tax Calculator to see your specific numbers. Input your actual business income, select your filing status and state, and see exactly how much you might save with S Corp election.
The calculator handles all the complex tax math – from SE tax and payroll taxes to QBI deductions and federal brackets – and shows you a complete side-by-side comparison in seconds. It's the same analysis we walked through above, but customized to your exact situation.
So, Does an S Corp Save Me Taxes?
S Corporations save taxes by splitting your income into two categories: salary (subject to payroll tax) and pass-through net profit (not subject to payroll tax). This strategy can save thousands of dollars annually for business owners with substantial income, but it requires careful planning, reasonable salary determination, and additional administrative work.
The key question isn't just "does S Corp save taxes?" – it's "does S Corp save enough taxes to justify the extra complexity in my specific situation?" Run your numbers, factor in all costs, and make an informed decision based on your unique circumstances.
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Legal Disclaimer: The information provided in this article is for educational purposes only and should not be construed as tax, legal, or financial advice. Tax situations are highly individual and complex. Always consult with a qualified tax professional, CPA, or attorney before making any decisions regarding S-Corporation elections, entity structure changes, or tax planning strategies. Calculator results are estimates only and may not account for all relevant tax provisions or your specific circumstances. SCorpGuide.com and Forever Exploring LLC are not liable for any decisions made based on information provided on this site. For complete terms, see our Terms and Disclaimers.
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