Reduce your federal self-employment tax by electing to be treated as an S-Corporation
Did you know if you’re self-employed or an employee, you have to pay Social Security and Medicare taxes to the government?
Your payroll tax burden as a self-employed entrepreneur is 15.3% because you have to pay both portions of the tax.
Your payroll tax burden when you work for someone else, is 7.65% because you’re only responsible for part of these taxes. Your employer pays the other half.
How do you save money with an S-Corp election?
When you are an LLC or sole proprietor, you have to pay self-employment tax on your entire taxable business income.
If you elect to be taxed as an S-Corp, you have to pay yourself a salary via a paycheck. Those wages are subject to self-employment tax, however the remaining earnings of your business are NOT subject to self-employment tax.
If your business has net income of $100,000 and you’re taxed as an LLC, you will owe about $15,000 in self-employment tax. However, if you elect to be taxed as an S-Corporation and take a $60,000 salary with the remaining $40,000 being a distribution to you or you keep it in the business, you pay only $9,180 in self-employment tax, saving you nearly $6,000 in self-employment taxes!