Potential S corporation owners often ask how much money they can save with an S corporation.

While it is impossible to provide an exact number, since so many factors are involved, and everyone’s situation is different, it can be estimated.

Self-Employment Tax Savings

The primary way S corporation owners save on taxes is via minimizing self-employment taxes.

Self-employment taxes fund Social Security and Medicare and are equivalent to the payroll taxes taken out of a paycheck when you are an employee.

If you are a business owner, you have to pay both the employer and employee portions of the self-employment tax.

For 2023, the self-employment tax, for the first $160,200 of net income is 15.3%. This is a combination of 12.4% for Social Security tax and 2.9% for Medicare tax.

Let’s Assume Your S Corporation Brings in $100,000 a Year

Let’s say your accountant suggests that you classify $60,000 out of the $100,000 as your salary. The other $40,000 could be classified as a distribution, which is not subject to self-employment tax.

Instead of paying the 15.3% on the entire $100,000, you would pay it only on the $60,000 classified as salary. Instead of paying $15,300 in self-employment taxes, you could potentially only have to pay only $9,180. This could result in a tax savings of $6,120.

Again, this is a very basic hypothetical but gives you a general idea of why many decide to form S corporation for tax savings.

Please always be sure to consult with an accountant regarding any tax questions you may have.

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