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I explore the S Corp election, a tax strategy that can help business owners—especially LLCs and sole proprietors—reduce self-employment taxes. When operating as an LLC or sole proprietor, all income is subject to self-employment tax at 15.3%, but electing S Corp status allows me to split my income between a salary (taxed normally) and distributions (which avoid self-employment tax). I discuss when this election makes sense—typically when net profit exceeds $50,000 and is expected to grow—along with the need to set a reasonable salary, run payroll, and file additional tax forms. While this strategy can save money, I also highlight the downsides, including added paperwork, payroll costs, and potential IRS scrutiny if salary justification isn’t handled properly. I walk through the steps to elect S Corp status, point out common mistakes to avoid, and emphasize the importance of consulting a tax professional before making this decision.
Key Takeaways:
• Unlike LLCs and sole proprietors, S Corps allow owners to split income into salary (taxed normally) and distributions (which avoid self-employment tax).
• Generally, S Corp election makes sense when net profit exceeds $50,000, and it becomes a strong consideration at $100,000+
• The IRS requires S Corp owners to pay themselves a fair market salary before taking distributions to prevent tax avoidance.
• The IRS may scrutinize S Corps, particularly if owners pay themselves an unreasonably low salary while maximizing distributions.
• Businesses with fluctuating or low profits may not benefit from S Corp election due to payroll and compliance costs.
• S Corp owners should maintain distinct business and personal accounts and use accounting software for tracking.
Key Timestamps:
(00:00) – Understanding S Corp and Self-Employment Tax
(02:03) – Tax Benefits of S Corp Election
(03:27) – When to Consider S Corp Election
(04:29) – Setting a Reasonable Salary
(06:07) – Downsides of S Corp Election
(07:38) – How to Elect S Corp Status
(09:06) – Who Should Avoid S Corp Election
Key Topics Discussed:
BLUF Veteran Finance Podcast, Military Finance, Veteran Financial Planning, Military Money Management, VA Benefits, Military Retirement Planning, Financial Literacy for Soldiers, Military Budgeting Tips, Debt Management for Service Members, VA Loans, Military Investment Strategies, Saving for Deployment, Thrift Savings Plan (TSP), Transitioning to Civilian Life, Military Tax Benefits, Financial Independence for Veterans, Military Money Manual, The Military Money Show
More of Baskin Financial Planning:
Download the Ultimate Military Finance Checklist, with 7 pages of critical things to be thinking about to clarify your journey to financial freedom.
Think you might need some financial help? Book an intro call with me to see if we would be a mutual fit.
Questions or comments, drop me a note at: erik@baskinfp.com
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