{"id":3638,"date":"2022-03-16T08:00:21","date_gmt":"2022-03-16T12:00:21","guid":{"rendered":"https:\/\/www.incsight.net\/?p=3638"},"modified":"2026-07-15T18:18:17","modified_gmt":"2026-07-15T23:18:17","slug":"what-is-an-s-corp","status":"publish","type":"post","link":"https:\/\/www.incsight.net\/blog\/2022\/03\/16\/what-is-an-s-corp\/","title":{"rendered":"What Is An S Corp?"},"content":{"rendered":"
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Before I get started, I just want to let you know that we did an entire series on S Corporations on both our Blog and Small Business Tax Savings Podcast, so if you want to dig deeper from what we discuss today, check that out.\u00a0<\/p>\n

Everything You Need To Know About S Corporations<\/a><\/p>\n

We also have a very in depth deep dive into S Corporations as a Module in our\u00a0<\/span>Tax Minimization Program<\/a>. If you are a member you will want to go through that entire module, if you are not a member now is a great time to join!<\/p>\n

With that being said, I always like to do a refresh on S Corps every year so that is what we are talking about here!<\/p>\n<\/div><\/div>\n\n

What Is An S Corporation?<\/h1>\n

An S Corporation is simply a tax election. It is not a separate entity. You need to have an LLC or a C Corporation already setup and then you simply elect for that entity to be taxed as an S Corporation.<\/p>\n

As part of our\u00a0<\/span>Tax Minimization Program<\/a>\u00a0<\/span>we go through the exact steps you need to take to elect S Corp status so you are able to do it all on your own!<\/p>\n

Why Would Someone Want To Be An S Corporation?<\/h1>\n

Great question! The number one reason we see small businesses electing S Corp status is to save on self employment taxes.<\/p>\n

The majority of businesses we see are setup as an LLC and thus paying self employment taxes on the profits of their business. Lets go through a quick example to illustrate:<\/p>\n

As a Sole Prop or Single Member LLC (SMLLC) you pay your normal income tax rate on the income of your business as well as self employment taxes.\u00a0Self\u00a0employment tax is broken into two separate pieces, Social Security and Medicare.\u00a0Social Security is 12.4%<\/strong>\u00a0on your first $147,000 (2022) of business income.\u00a0Medicare is 2.9%<\/strong>\u00a0on your total business income. The total\u00a0combined is 15.3%<\/strong>.<\/p>\n

\"Breakdown<\/p>\n

In this example, if your business profited $80,000 you would have $11,304 in self employment taxes and that would be over and above your normal income tax rate.<\/p>\n

An S Corp is a strategy that may work to help reduce the amount of self employment taxes. As part of our\u00a0<\/span>Tax Minimization Program<\/a>\u00a0<\/span>we have a Payroll Tax Savings Calculator that you can use to enter your specific data to see what your savings would be.<\/p>\n

How Is An S Corp Taxed?<\/h1>\n

As an S Corporation there is no federal income tax at the corporate level instead the profit from the S Corp flows through to your personal return. You will pay your normal income tax rate on the income from the S Corporation and you will pay \u201cself employment taxes\u201d on your salary from the S Corp.<\/p>\n

Salary? Yes, with an S Corp you must be a W2 employee of the company and pay yourself a reasonable salary which you get hit with self employment taxes on.<\/p>\n

However, any profit from the business over and above your salary you can take as a\u00a0dividend and thus avoid self employment tax on that portion.<\/p>\n

Lets look at a diagram:<\/p>\n

\"Diagram<\/p>\n

Essentially we are taking the profit of your business and splitting it into two pieces, a salary and dividend.\u00a0<\/p>\n

If we compare this to a Sole Prop or SMLLC you can see the advantage is that instead of paying self employment taxes on 100% of your income, you only pay it on the payroll portion but any other earnings from the business are just taxed at your normal income tax rate.<\/span><\/p>\n

What\u00a0Is The Difference In Taxes Between A Sole Proprietorship\u00a0and S Corp?<\/span><\/h1>\n

Lets take what we discussed above and do a side by side example to show the tax differences between the two.<\/span><\/p>\n

\"Side-by-side<\/span><\/p>\n

In this example with $80,000 of profit if you were setup as a\u00a0sole proprietor or disregarded entity\u00a0you would pay $11,304 in self employment taxes. This\u00a0in addition<\/strong>\u00a0to your normal income tax rate.<\/p>\n

However, with an S Corp we only pay self employment taxes on our payroll. In this example we assumed a reasonable salary of $36,000 which would amount to $5,928 in payroll taxes.\u00a0<\/p>\n

As you can see by simply electing S Corp status you would see tax savings of $5,376. These would be savings you would see each and every year!<\/p>\n

You may be wondering, if I took a salary of only $36,000 what happened to the other $44,000. You would take that as a dividend (similar to an owners draws) and it would not be subject to self employment taxes. This is where the tax savings occurs.<\/p>\n

Of course these savings are self employment tax savings, you would still owe your normal income tax rate as well, in both scenarios.<\/p>\n

As mentioned above as part of our<\/span>\u00a0<\/span>Tax Minimization Program<\/a>\u00a0we have a Payroll Tax Savings Calculator that you can use to enter your specific data to see what your savings would be.<\/span><\/p>\n

Is There Any Disadvantages To An S Corp?<\/h1>\n

Good thing you asked. Yes, there are some disadvantages to an S Corp and most of these really just come down to a little more compliance and complexity.<\/p>\n

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  1. Separate Business Tax Return<\/strong>\n