Blog: How an S-Corp Election Could Save You Thousands in Taxes
If you're running a profitable business, youโve probably asked yourself: 'Am I paying more in taxes than I really need to?' If you havenโt considered the S-Corp election yet, nowโs the time to give it a serious look. The S-Corp election is one of the most effective ways small business owners can reduce self-employment taxes while staying compliant with IRS regulations. But is it the right move for you? Letโs break it down...
What is an S-Corp and How Does It Work?
An S-Corp is like getting VIP treatment for your business taxesโyou follow a few extra rules, but the perks can be huge. Itโs not a separate business type but a tax election that LLCs and corporations can opt into for major tax perks. Unlike a sole proprietorship or single-member LLC, where all profits are subject to self-employment taxes, an S-Corp allows you to split your earnings into two categories: a reasonable salary and distributions.
Why does this matter? Because only your salary gets hit with self-employment taxes, while distributions donโtโmeaning you keep more of what you earn. That means more money stays in your pocket instead of going to taxesโsomething every business owner wants to hear.
For example, if your business earns $100,000 in profit and you pay yourself a salary of $60,000, the remaining $40,000 can be taken as distributions. You only pay self-employment taxes on the $60,000 salaryโpotentially saving thousands compared to being taxed on the full $100,000.
One of our clients nearly fell out of her chair when we told her she saved $15,354 in taxes just by electing S-Corp status for 2024. Thatโs real money she got to reinvest in her business instead of handing over to the IRS.
Who Qualifies for S-Corp Status?
Not every business is eligible to make the S-Corp election. To qualify, your business must:
Be a domestic LLC or corporation.
Have no more than 100 shareholders.
Ensure all shareholders are U.S. citizens or residents.
Itโs also important to consider whether your business brings in enough steady profit to make the S-Corp election worthwhile. Running an S-Corp comes with added responsibilitiesโthink payroll processing, tax filings, and bookkeepingโso if your profits are inconsistent or still on the lower side, the costs and admin work could cancel out the tax savings. If youโre in a growth phase but not quite at a stable income level, it might make sense to hold off until your revenue is more predictable.
The Pros and Cons of an S-Corp Election
Saving money on taxes sounds amazing (because it is!), but letโs talk about what youโre signing up for.
Cons
More IRS scrutiny, particularly regarding salary vs. distributions
Payroll and bookkeeping requirements
Additional filing obligations (such as W-2s and payroll taxes)
Pros
Pay less in taxes and keep more of your earnings
Unlock tax-saving strategies not available to sole proprietors
Take home more profit with a smarter pay structure
How to Make the S-Corp Election
If you decide an S-Corp is right for you, hereโs what you need to do:
File Form 2553 with the IRS to elect S-Corp status.
Meet the deadlineโtypically within two months and 15 days of the start of your tax year.
Set up payroll and pay yourself a reasonable salary.
Maintain records to stay compliant with IRS requirements.
Letโs be realโno one launches a business because theyโre excited about payroll and tax forms.
Thatโs why many business owners team up with a tax pro to handle the nitty-gritty while they focus on growing their business.
Final Thoughts
The S-Corp election can be a powerful tax strategy, but itโs not one-size-fits-all. If your business is generating steady profits and youโre ready to handle the administrative responsibilities, it could be a smart move.
Before you dive in, take a breath. Review your numbers, talk to a tax expert (aka us!), and make sure this move sets you up for successโnot a headache.
Making the right choice now could mean thousands in tax savings down the road.
TL;DR Choosing an S-Corp election can help you keep more of your money by lowering self-employment taxesโbut it does come with some extra paperwork. If your business is making $60K+ and you're good with handling payroll (or outsourcing it), it might be worth it.
Disclaimer: The information provided in this blog is for educational purposes only and does not constitute financial, legal, or tax advice. Reach out to The Freelance CFO team with any questions regarding specific financial concerns, or seek the services of a qualified adviser.
