What to Know About Saving Money by Filing Taxes as an S Corp?

Is your small business projected to make close to 100K or more in net profit this year? If so, you should consider classifying your business as an S Corporation (or “S Corp”). This move could save you thousands on taxes. But, before you go running to make this change, there are a few key points to go over!

I’m Paige Griffith, CEO and lead attorney behind The Legal Paige. We’re an online legal education platform and contract shop for small businesses. We serve creatives such as photographers, event planners, coaches, course creators, and more. We’re here to help you get Legally Legit® in no time—without breaking into hives!

First, what is an S Corp?

Legally speaking, the biggest thing to remember is that an S Corp is not a business entity; it is a tax designation.

When someone says they're an S Corp, they are usually also an LLC in their state. That’s because there isn’t a limited liability company (or “LLC”) designation for federal taxes. For tax purposes, the IRS defines “businesses” as sole proprietorships, partnerships, C corporations, or S Corporations. Single-member LLCs are taxed as sole proprietorships. Multi-member LLCs are taxed as partnerships.

However, LLC owners can choose to be taxed as an S Corp if they file the necessary documents with the IRS.

To learn more about Sole Prop vs. LLC vs. S Corp, review this guide or check out my YouTube video below:

Sole Proprietorship vs LLC vs S-CORP - EXPLAINED BY LAWYER [2024] 

S Corps and Taxes: What are the Benefits?

The major benefit of being taxed as an S Corp is that you can pay less self-employment (or “payroll”) taxes. The self-employment tax rate is currently 15.3% (12.4% toward Social Security and 2.9% for Medicare). 

This can be a big chunk of change for people bringing home 60–80K or more, and especially for business owners with a six-figure net profit.

Let's break this down with an example comparing taxes as a regular LLC to those as an S Corp.

LLC Taxes Example:

• You net 100K in profit with your LLC.

• You pay self-employment tax on the full amount at 15.3% = $15,300

S Corp Taxes Example:

• You earn 100K in profit with your LLC but elect S Corp status for tax purposes.

• You pay yourself a “reasonable salary” of 70K as W-2 wages.

• You leave the remaining 30K as business profit. (You can distribute this to yourself without it being subject to payroll taxes.)

• You pay payroll tax on your salary of 70K at 15.3% = $10,710

In both scenarios, you still need to pay federal income tax and state income tax (if applicable in your state). 

The benefit of an S Corp is that you only have to pay payroll taxes on your salary.  In this scenario, it would save you $4,590 in taxes. That’s money you could reinvest in your business for opportunities like new equipment or marketing. Or, you could take it as a distribution and enjoy a nice spring break vacation!

To learn more about how S Corp taxes work, catch Episode 77 of The Legal Paige Podcast: Understanding the Benefits of S Corps and Taxes.

S Corp Requirements

To meet the IRS requirements for an S Corp, you must: 

• Have fewer than 100 shareholders who are all individuals, not corporations

• Have only one class of stock available

• Be owned by U.S. citizens or resident aliens

Most solo business owners will easily qualify for S Corp status.

What is a disadvantage of an S Corp?

Despite the advantages of S Corp status, there are a couple of downsides to be aware of.

1. You need to be careful to pay yourself a  “reasonable salary.”

To be taxed as an S Corp, you need to be cautious about how much you pay yourself from your business. If you pay yourself too little, the IRS may assume you’re trying to avoid self-employment taxes. In that case, you could end up owing back taxes, penalties, or fines. 

A “reasonable salary” depends on factors like industry rates, experience, company profits, and location. Take the time to research and justify a reasonable salary according to your region and industry. I usually say that $60K–$80K is in the ballpark of a reasonable salary nowadays, but you should seek out a CPA if you need more guidance.

Once you’ve paid yourself a reasonable salary, you can take additional profits as a distribution. A distribution is a payment made to the shareholders (or owners) of an S Corp. These are NOT subject to self-employment taxes as we talked about above.

2. Payroll management and MORE tax returns.

Designating your business as an S Corp requires more work organizing payroll and filing more tax returns. You would have to file an additional tax return for your S Corp on top of your regular tax return. 

Usually, this involves paying for a payroll service and a CPA to help you with these filings, so it's a bit of an increased cost to your business. But, of course, if you're still in the black while saving thousands, it's likely worth the extra hassle.

For more tips on how to legally pay yourself an entrepreneur, check out THIS BLOG ARTICLE.

At what income level is an S Corp worth it?

If you don't know how much money your business will make over the year, it probably doesn't make sense for you to become an S Corp right now. You can always change your tax status later. 

However, if your business is projected to make over $60-$80K in the coming year, you should absolutely look into S Corp status. If you’re making six figures, there’s a good chance it’s worth it for you.

How to Legally File Your Business Taxes as an S Corporation

To file taxes as an S Corp, you must first register your business as an LLC in your state. If you haven’t already registered, you can use one of our state-specific LLC Registration Guides for help.

Next, file your S Corp election through the IRS. To do this, submit Form 2553, Election by a Small Business Corporation. Be sure to follow the IRS instructions. You can do this on your own or with an accountant.

Form 2553 S Corp Deadline

You can't retroactively switch to an S Corp for the previous tax year. For example, if you want your LLC to be taxed as an S Corp for 2025, you need to file Form 2553 by March 15, 2025.

If you miss the deadline, you can still file, but the S Corp status will apply to the next year (in this case, 2026). 

The Legal Paige Take: S Corps

If your business is making six figures (or getting close), changing your status to an S Corp may save you thousands in federal taxes! 

Just keep in mind that you’ll still need to pay payroll taxes on a “reasonable salary” amount. It also takes some more work to manage payroll and additional tax forms.

Want more guidance on which business structure is right for you? This free guide covers the basics of sole proprietorships, LLCs, and S Corps.

DOWNLOAD OUR FREE BUSINESS STRUCTURE GUIDE HERE

Helpful References

• IRS.gov. S Corporations

• IRS.gov. LLC filing as a Corporation or Partnership

Related Content from The Legal Paige

• The Legal Paige Blog: “How Do I Pay MYSELF as an Entrepreneur?” 

• The Legal Paige Blog: “How to Choose Your Business Entity: Sole Prop vs. LLC vs. S-Corp”

• The Legal Paige YouTube Channel:Sole Proprietorship vs LLC vs S-CORP - EXPLAINED BY LAWYER [2024] 

• The Legal Paige Podcast: Episode 5, “What you NEED to know about biz structures for your taxes”

• The Legal Paige Podcast: Episode 77, “Understanding the Benefits of S Corps and Taxes”