Considering an S Corporation? It Could Help You Save on Self-Employment Taxes
- Steve Julal
- Oct 21
- 3 min read
If you own a small business that isn’t incorporated, you probably know how painful self-employment (SE) taxes can be. Between Social Security and Medicare, those taxes can take a big bite out of your income.
The good news? Converting your business to an S corporation (S corp) may be a smart way to reduce your SE tax bill — and keep more of your hard-earned money.
Understanding SE Tax Basics
When you operate as a sole proprietor, partner, or certain types of LLC owner, your share of business income is subject to SE tax.
In 2025, the SE tax rate is 15.3% on the first $176,100 of net earnings — that includes 12.4% for Social Security and 2.9% for Medicare.
Once your income passes that $176,100 threshold, the Social Security portion stops, but the Medicare tax continues — and even increases to 3.8% for higher earners due to an extra 0.9% Medicare surtax.
That adds up fast, especially for profitable small businesses.
How an S Corp Can Help Reduce Taxes
Here's where the S corporation structure can make a big difference.
When your business operates as an S corp, you can:
Pay yourself a reasonable salary, which is subject to employment taxes, and
Take the rest of your profits as distributions, which generally aren't subject to SE tax.
This combination often results in significant savings compared to being taxed as a sole proprietor or partnership.
Important Considerations
While an S corp can be a powerful tax strategy, it’s not the right fit for everyone. Here are a few key points to consider:
Your salary must be reasonable.The IRS requires shareholder-employees to pay themselves a fair wage for the work they perform. Paying yourself too little can trigger an audit or penalties. We can help you determine what “reasonable” looks like for your industry.
Retirement contributions may be affected.A smaller salary means smaller contributions to certain retirement plans, such as SEPs or profit-sharing plans (which cap contributions at 25% of compensation). However, if your business offers a 401(k) plan, you can still make healthy contributions even with a modest salary.
You’ll take on a bit more administration.Operating as an S corp means filing a separate business tax return, following corporate formalities (like maintaining minutes), and properly recording shareholder transactions. It’s manageable — but it’s important to stay compliant.
How to Convert Your Business
If you’re currently a sole proprietor or partnership, to convert to an S corp,:
1. Form a corporation with your state.
2. Transfer your business assets to the new entity.
3. File Form 2553 with the IRS by March 15 to elect S corporation status for that year.````1
If you already operate as an LLC, you may be able to skip the incorporation step. Eligible LLCs can simply file the same election form with the IRS by March 15.
Should You Make the Switch?
Switching to an S corporation can be an excellent way to lower your tax burden and improve cash flow — but it’s not a one-size-fits-all solution. The right choice depends on your income, goals, and how your business operates.
Our team can help you run the numbers and handle the conversion process from start to finish.
Thinking about making the switch? Contact us today to discuss whether an S corporation could be the right move for your business.
