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One of the biggest tax advantages of setting up an S corp is that you can split your income in order to reduce your self-employment taxes.

When you’re self-employed, you have to pay payroll taxes on your income, which is 15.3% for Social Security and Medicare. You can save on this by setting up an S corp and paying yourself a reasonable salary. As an S corp, you can split your income between owner income and employee income, and only the employee income would be hit with self-employment taxes.

• Owner income: Profit distributions as an owner that are taxed at a much lower rate. • Employee income: Your salary on which you pay payroll taxes.

You pay 0% self-employment tax on the money that you pay yourself as an owner. Only the money that you pay yourself as an employee in W-2 income is hit with self-employment taxes. Without an S corp, you’ll have to file a Schedule C and you’re taxed on the net income. This figure gets hit with federal tax, state tax, and self-employment tax. The S corp will not help you save on federal and state tax; it will help you save on self-employment tax.

Example

For example, let’s pretend you’re a massage therapist that just opened your own practice. Previous to opening your own practice, you used to work for a hospital and made $80,000 in salary.

In your own practice, you might now be making $1,000/hour working with world-class athletes, a major jump from your previous W-2 salary. However, with an S corp, you get to determine your own salary. You can still say that the going salary for a massage therapist is $80,000.

Instead of paying self-employment on the entire amount your business makes, you can choose to only pay yourself $80,000 and pay self-employment tax on that amount.

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