S-Corps help you save on Social Security and Medicare taxes. Here’s an example:
Let’s say you have two self-employed people, Joe and Chris, who are both construction workers. Their businesses make the same net profits of $60,000 last year ($5,000/month). The only difference is that Joe is a Sole Proprietorship (on personal return) and Chris is an S-Corporation.
Because Joe is a sole proprietorship, there is no difference between him and the business. They are one and the same. Therefore he has to pay self-employment taxes (Social Security + Medicare) of 15.3% on the entire $60,000 annual net profit, or about $9,200. He also must pay federal and local income taxes on that income.
Chris is a bit different. He incorporated his one-person business into an S-Corporation, which is a separate entity. He wears two hats: He is the sole shareholder of that corporation, and also the sole employee.
S-Corporations are a ‘pass-through’ entity, which means all the profits of the corporation pass through directly to the shareholders’ tax returns. S-Corps do not pay corporate income taxes.
You will not be able to take ALL the S-Corporation income passively (no Medicare or Social Security tax), but you will take most of it this way. In most situations, our clients take about 20-40% of the net income as an employee. This means that Chris would pay Social Security and Medicare tax on about $12k-24k. The net savings then becomes about $5520-7360 (not $9200), which is still better than zero.
Contact us now and we can start your very own S-Corp.