Want to keep more of what your business earns?
The average entrepreneur gives up way too much money to the IRS. It’s not because they work hard or make a lot of money. Most entrepreneurs simply haven’t heard of tax elections.
What if there was a way to legally save thousands every single year?
Few tools are more powerful than the S-Corp election. Here’s why…
It costs almost nothing to set up.
Here’s the breakdown:
- What Is The S-Corp Election?
- Why Strategic Tax Elections Build Wealth
- The Big Tax Savings Most Owners Miss
- 4x Common S-Corp Election Mistakes
- When To Make The S-Corp Election
What Is The S-Corp Election?
An S-Corp election is a tax status that allows income to be passed through to owners of a small business. The corporation does not pay federal income taxes, instead profit is reported on personal tax returns.
This is called pass-through taxation, and it changes the entire game for business owners.
Ok, so here’s the thing: An S-Corp is not another form of business. It’s a tax status. An LLC or corp files IRS form 2553 to request permission from the IRS to be taxed as an S-Corp. Follow the complete instructions for filing IRS form 2553 to ensure the S-Corp election is approved the first time.
Incidentally, S corps surpassed C corps as the most popular corporate filing way back in 1997. They still are. Smart business owners know why.
The S-Corp election allows for:
- Pass-through taxation (no double tax bill)
- Big savings on self-employment tax
- Asset protection (the business stays separate)
- Eligibility for the 20% QBI deduction
Pretty powerful, right?
Why Strategic Tax Elections Build Wealth
Many small business owners view tax planning as an annual savings opportunity. However, the power of tax elections is compounded over time.
Think about it:
Each dollar saved on taxes has the potential to be reinvested into your business. That could be new equipment, advertising initiatives, debt reduction or directly into retirement funds.
The tax savings between a full paying self-employment tax LLC versus an S-Corp can equal exponential wealth creation over 10+ years. Savvy business owners take advantage of that difference.
Tax elections also convey information to lenders, investors, and partners. An S-Corp election says you are serious. It shows you are operating your business as a legitimate, professional organization, and not a hobby you run on the weekends.
Here’s how the wealth-building effect works. It’s simple. Tax savings are invested back into the business. The more money you have to invest back in your business, the more your business grows. The bigger your business grows, the more tax savings you will have next year. And that’s how it begins to compound.
That credibility opens doors to:
- Better loan terms
- Outside investment opportunities
- Higher business valuations at sale time
The Big Tax Savings Most Owners Miss
This is where the S-Corp election really starts to shine.
Okay, here’s how the savings work. If you’re a regular self-employed person, you pay 15.3% self employment tax on every dollar of profit. Yep, that includes Social Security and Medicare taxes on 100% of your profit.
But with an S-Corp election…
The owner only pays themselves a modest salary. Only that salary is subject to payroll tax. The remaining profit is withdrawn in distributions not taxed as self-employment.
Tax reports show that S-Corps save between $5,000 to $50,000+ per year just by utilizing this method. That’s serious Benjamins to reinvest back into your business.
Quick example:
- Sole proprietor with $100,000 profit pays roughly $15,300 in self-employment tax
- S-Corp owner pays $50,000 salary + $50,000 in distributions
- Self-employment tax only hits the $50,000 salary portion
- That saves around $7,500 in payroll taxes
That’s $7,500 per year. Every year. Building serious wealth over time.
4x Common S-Corp Election Mistakes
The S-Corp election is potent. There are however rules to follow. Mess this up and the IRS can revoke those tax benefits (plus penalties).
Mistake #1: Paying Yourself Too Little
The IRS mandates a “reasonable salary.” Pay yourself $10,000 and attempt to take $200,000 in distributions? Huge issue. The IRS will reclassify the distributions as salary and charge you back taxes.
Mistake #2: Missing The Filing Deadline
Form 2553 must be filed within 2 months and 15 days after the beginning of the tax year. If you miss the deadline, the election will not take effect until the next tax year.
Mistake #3: Skipping Payroll
Owners of S-Corps can’t simply take money out of the company. You must have an actual payroll, with W-2s, quarterly payments, etc.
Mistake #4: Ignoring State Rules
Making a federal S-Corp election does not always translate to the state level. Each state has different regulations, fees and forms. WISE business owners research both prior to election.
When To Make The S-Corp Election
Not every business should be an S-Corp. The math has to work first.
The rule of thumb? Expect to clear $40,000 to $60,000 per year in net profit before deciding that an S-Corp election is right for you. Any less than that and you could end up losing some of the savings to payroll, tax prep, and compliance fees.
Good candidates for the S-Corp election include:
- Profitable single-member LLCs
- Service-based businesses with low overhead
- Consultants and freelancers earning $60K+
- Small agencies and ecommerce stores
- Real estate professionals (in some cases)
Bad situations include: having more than one owner and disagreeing on salary, operating at a loss or planning to take on foreign investors.
Bringing It All Together
The S-Corp election is the least utilized wealth building tool in business. It saves you thousands of dollars per year. And that money compounds into real wealth.
But the S-Corp election isn’t a magic bullet. It only works when:
- The business is profitable enough to justify the extra costs
- The owner pays a truly reasonable salary
- All the paperwork gets filed correctly and on time
- Both federal and state rules are followed
Tax elections should be made with a long-term perspective in mind. They require some investment of time up front. However, the benefits realized over a 10x or 20x time horizon can be transformative to a business owner and their family.
The best course of action is to meet with a competent tax professional before making any election. The proper election at the proper time can take a business from “getting by” to creating true wealth.
Take action now. Future business profits will thank you.
