Here’s How Much You’ll Save In Taxes With an S Corp (Hint: It’s a LOT)

I’m going to share how you can save thousands of dollars in taxes every year by simply setting your business up to be taxed as an S corp.

This is probably one of the easiest ways to save on taxes if you currently run a profitable business and have it setup as an LLC.

In fact, by spending just a few hours to do this for my business back in 2017, I’ve saved over $10,000 in taxes every year since.

That’s not life changing money, but it’s still a solid chunk of cash, and the more my business grows, the more I save.

Here’s a simplified table to demonstrate how much you can expect to save by filing S Corp status based on your income.

Actual tax savings will vary depending on your state and some other factors (see table at bottom of page for more details).

How does filing S Corp status save on taxes?

Put simply, it reduces your Self-Employment (SE Tax) taxes significantly.

With an LLC or sole proprietorship, you have to pay SE Tax on every dollar of income your business generates for you. With an S corp, you only have to pay SE tax on your salary (which you get to determine).

The last time I checked (December 2020), Self-Employment tax is currently set at 15.3% of Net Earnings. That’s 12.4% for Social Security, and 2.9% for Medicare.

So, this is no small tax.

EXAMPLE

So let’s say that you are a self-employed handyman who formed your business as an LLC. You work by yourself and have no employees. This year your business generated $150,000 in revenue and you had $50,000 in expenses (tools, gas, insurance, materials, etc.). That means your Net Earnings were a clean $100,000 and you would have to pay 15.3% of that in SE taxes. That comes out to a whopping $15,300 in SE Tax.

$15,300 is a lot of money to pay in taxes, especially considering that you still have to pay Federal Income Tax on a good portion of what’s left over.

Now, let’s say this year you got smart (or just read this article), and decided to take a few hours to request that the IRS treats you as an S corp.

With an S corp, you will only have to pay that 15.3% SE Tax on your salary, but NOT the net earnings.

So let’s say you decide that an appropriate salary for you is about $40,000 per year based on how much you’d have to pay someone if you hired them to do your job.

Now, let’s say that next year you make exactly the same amount that you made this year, except this time you have elected to be taxed as an S corp (smart move).

Now, you only had to pay $6,120 in self employment taxes! That’s $9,180 less than before you setup your business as an S corp.

That is not a typo. You could save over $9,000 per year in taxes by simply knowing what to do and then jumping through a few hoops to be considered an S corp.

This is because as an S corp, you only have to pay Self-Employment taxes on your salary. The rest is considered profit that you can pay yourself through shareholder distributions (a fancy name for paying yourself SE Tax-free).

Here’s that same example shown with just the numbers:

The Downside of Filing as an S Corp

Of course, things are never really that easy, and as I mentioned earlier, you will have to jump through a few hoops to make this happen.

Here are a few ways having an S corp makes things slightly more complicated:

• You have to deal with Payroll – This is actually easier than it sounds especially once you get it setup. For my business, I just hired my bookkeeper to handle my payroll. I pay her $70 per month and she cuts me a paycheck twice a month and makes sure taxes get paid.
• More detailed accounting is required – As an S corp there are more strict rules for accounting. I’m not going to get into what they are here, but just know that your accounting is held to a higher standard by the IRS. Again, I had my bookkeeper help me make sure my accounting practices were up to par.
• It’s more expensive to file taxes – I pay a pro to file my taxes. After switching to an S Corp, the fee I paid went from $350 to $650 (a $300 jump).
• You have to pay Employment Taxes – There are two additional taxes you’ll have to pay: Federal Unemployment Tax and State Unemployment Tax (FUTA and SUTA). These taxes are relatively small if you are self-employed, but they are there and need to be considered.

By the way, these extra taxes and expenses are already included on the simple table above and the more detailed table above.

This might seem overwhelming at first, but it’s all pretty simple as long as you have an accountant or a bookkeeper who knows what they are doing to help you out. I worked closely with my bookkeeper to get it all setup, and all I paid was $150 for the initial setup.

Yes it is work, but it’s well worth the effort as you’ll see below.

How much would you save if you elected S corp status? Is it worth it?

At this point you’re probably wondering…Is this really worth the effort? Especially considering the complexity and extra taxes you have to pay?

Well, just like everything in business, it all comes down to crunching some quick numbers, which I’ve already done for you (you’re welcome).

In most cases, the answer is yes, it is definitely worth it, especially as your profits grow.

But I don’t want you to take my word for it. Take a look at the table below to help you estimate how much you could expect to save by electing S corp status for your business.

Table 1: Estimated Tax Savings By Electing S corp Status*

*The salary’s listed are not necessarily representative of a reasonable salary. That must be determined by you, the business owner.

Let’s examine the table above for a second.

On the left, you have your Net Earnings which I explained above. That is basically your profit before paying yourself.

Next you have the “Salary Paid to Self” column which should be self explanatory – it’s the salary that you decided was a reasonable salary to pay yourself. Now if you’ve been paying close attention so far, you’re probably thinking…“Hey, why don’t I just pay myself a ridiculously low salary (like say $10K per year) so I pay even less SE Tax?” Well, as you may have guessed, the government would frown upon that and you would risk owing lots of money later in back taxes. So you want to figure out a reasonable salary given your job description. In the table above, I just set the salary as 50% of the Net Earnings. That is not for any reason other than to create this example table.

Next in the table, you have the red columns, which are the additional taxes and expenses that you may have as a result of managing an S corp, with the furthest right red column being a total of all of these. Of course, these taxes and expenses may be lower or higher for you, but the table should give you a good estimation.

Then you have the green columns. The one on the left is how much you’ll save on Self-Employment taxes based on the other numbers in any given row. The very right column is the Net Savings, which is how much extra money you can expect to put directly in your pocket (before federal income taxes) as a result of electing S corp status.

As you can see on the table, as long as you are making $15,000 in profit above what you pay yourself as a salary, having an S corp will lead to a net positive. And, the higher your profits are after paying your salary, the more money you will save by electing S corp status.

Considering that this will only take a few hours of your time to do, it’s well worth it (it took me six hours).

Setting up an S Corp

Actually, you don’t “set up an S corp” because it’s not technically a business entity like a C corp or an LLC is. Instead, you simply elect that your LLC or C corp be taxed as an S corp. It’s basically just a way to be taxed.

So first, you need to form your business as either an LLC or as a C corp. So if you haven’t done that, that’s where you’ll want to start. For most handyman businesses or self employed people, an LLC is the best choice, but that should ultimately be determined by you and a knowledgable accountant. I’m not an accounting professional.

Then, you fill out a few forms for the IRS. Which forms you submit will depend on your situation. Here are the forms you’ll need if you have an LLC:

• From 2553
• Form 8832

Honestly, all of this can get pretty confusing which is why I strongly recommend getting help from your accountant or a knowledgable bookkeeper. I recommend finding somebody who you will pay to manage your payroll, and have them help you get setup since they will benefit financially from doing so.

Time is of the essence!

There is one more important thing to know. If you want to elect S corp status, then now is the time to do it (before the end of the year). That’s because there is a deadline at the end of the year. If you miss it, you’ll have to wait another whole year and continue overpaying in taxes.

Also, you can’t elect S corp status for the current year. It starts the year AFTER you submit your paperwork and get approved. So you unfortunately won’t be able to save on this years taxes, but if you set it up now you will be able to save on next year’s taxes and in future years.

And finally, if you are just starting your business and feel overwhelmed, this is something that you can put on the back-burner. Don’t allow this minutia to stop your progress. You have bigger fish to fry like simply getting started. Just start out forming an LLC and you can tackle this problem when you have the time.

Want More Simple Changes That Lead to Big Results?

Check out my $100K Handyman Pricing course. You’ll get in-depth videos packed with tips and tricks to boost your income, save time, and run a more enjoyable business.