Because when you work for yourself, the IRS makes you pay both halves of Social Security and Medicare. When you have a W-2 job, your employer covers half — you pay half.

When you’re self-employed, you are the employer and the employee — so you pay the full 15.3% on every dollar of profit (up to the Social Security wage base).
Add your income tax on top of that — it’s a real hit.

An S Corp doesn’t get rid of taxes — it just splits your profit in two buckets:

1) Wages: You pay yourself a reasonable salary through payroll — this part still has Social Security & Medicare taxes.

2) Distributions: Any leftover profit goes to you as a shareholder distribution — not subject to self-employment tax.

Same income tax either way — the savings comes from paying payroll tax on a smaller piece instead of your entire profit.

It depends on your profit and how much you pay yourself. A realistic target for many small businesses is saving about 7–10% of your net profit in self-employment taxes.

Example: If you clear $100,000 after expenses, an S Corp might save you $7,000–$10,000 a year.

It’s not magic — but it’s real money back in your pocket instead of Uncle Sam’s.

Yes — two big ones:

1️⃣ You have to run payroll. That means setting up withholding, filing payroll tax forms, paying yourself on the books — no skipping it.

2️⃣ You must pay yourself a “reasonable salary.” The IRS watches this. If you lowball your salary just to save more, they can reclassify your distributions and hit you with penalties.

Plus, you’ll have a separate S Corp tax return to file each year — more compliance, but worth it if the savings beats the cost.

The IRS rule is: pay yourself what you’d have to pay someone else to do your same job. There’s no magic number — it depends on your industry, profit level, and role.

A good starting point: many small business owners land at 30–50% of net profit for salary. Too high, and you lose the tax benefit. Too low, and you risk an audit.

That’s why clear books and smart planning matter.

Absolutely — that’s exactly when it makes sense. If you’re a sole proprietor or a single-member LLC, you can elect to have the IRS treat you as an S Corp for tax purposes.

Nothing changes with your state LLC — it’s just a tax election. You’ll file Form 2553 with the IRS to make it official.

If you missed the normal deadline, there’s still a fix — I handle late elections all the time.

You’ll pay yourself a salary through payroll — just like any employee. You’ll get a W-2 at the end of the year for that part. Then, any leftover profit gets paid out to you as a distribution. No payroll taxes on that piece — just income tax.

It’s clean, legal, and keeps the IRS happy if you do it right.

Two main risks:

1️⃣ If you skip the “reasonable salary” part and only take distributions — you’re asking for an IRS penalty.

2️⃣ If you mess up payroll filings — late fees, interest, and headaches.

Worst case: The IRS reclassifies your distributions as wages, charges back taxes plus penalties, and can remove your S Corp status if it’s really bad.

The good news? If you run it right — clean books, legit payroll, good records — you stay out of trouble and keep more cash.