Why switching to an S-Corp may save you thousands on taxes

If you have a sole proprietorship you may be able to save money on taxes by simply switching to an S corporation.

Some things to know about self-employment taxes is that it consists of two parts – Social Security and Medicare taxes.  An employee of a company will pay 6.2% in social security taxes and 1.45% in Medicare taxes, and your employer would pay 6.2% in social security taxes and 1.45% in Medicare taxes as well. Since you are self-employed you end up paying both the employee portion and employer portion on earnings which is a total of 15.3% (social security 12.4% and Medicare 2.9%).

So, let’s say you earn $100,000 in your sole proprietorship with 15.3% in self-employment taxes, you’ll end up paying $15,300 in self-employment tax. In an S corporation you’ll get paid a “reasonable salary” of $70,0000 for the year and the S corporation will withhold $5,355 and the owner will pay $5355 in taxes, for a total of $10,710 in taxes paid. The remaining $30,000 will be given to the shareholder as a distribution and is this not subject to self-employment taxes. To summarize the sole proprietor pays $15,300 and S corporation pays $10,710 for a total tax savings of $4,290.

As a side note, you will pay an additional .9% Medicare tax on the amount that your annual income exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. If your income is above these thresholds you would save even more than the standard amounts on self-employment taxes.

Another thing to note is that the amount of tax savings directly correlates with the amount of shareholders distributions you are able to take from the company’s profits.

To implement this strategy feel free to contact us!

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