Keep More of What You Earn—With the Power of an S Corporation
Thinking about forming an S Corp? We’ll break it down simply—and help you save thousands in taxes.
What is an S Corporation, and Why Should You Care?
If you're self-employed or run a small business, electing S Corporation status could mean major tax savings. An S Corp isn’t a new business type—it’s a tax classification that lets you split your income into wages and profits, reducing your self-employment tax bill.
Wages vs. Business Profits:
The Tax-Saving Split
Business Income = Reasonable Wages (15.3% tax) + Business Profits (0% self-employment tax)
You only pay Social Security and Medicare taxes (15.3%) on the Wages portion of your income. The rest—Business Profits—are not subject to self-employment tax. That’s where the savings kick in.
What Counts as a
Reasonable Salary?
The IRS expects your wage to reflect what you’d pay someone else to do your job. Too low, and you risk an audit. Too high, and you miss out on savings. A reasonable salary for you or your business will depend on these factors.
Your role and involvement
Experience level
Weekly hours
Local salary averages
Prior audit history
Replaceability
How the Numbers Play Out in Real Life
Example 1:
Passive Business
You run a website that automatically sells digital products. It earns $100,000/year.
A reasonable wage for this might be $10,000 (10% of your business income taxed at 15.3%).
The remaining $90,000? Exempt from self-employment tax.
Example 2:
Hands-On Business
You're a licensed physical therapist seeing patients full-time. You earn $100,000/year.
Someone else in your role would typically earn $75,000 annually.
That’s 75% of your income taxed as wages. Still some savings—but not as dramatic as passive business.
See What You Could Save with an S Corp
TRY OUR SAVINGS CALCULATOR
