The S-Corp Advantage: Self-Employment Tax
Unlike a Sole Proprietorship where 100% of profit is subject to Self-Employment (SE) tax, an S-Corp allows you to split earnings into W-2 Salary (subject to SE tax) and Distributions (not subject to SE tax). Use the sliders below to estimate your potential tax reduction.
Net profit before owner's pay.
Must be "reasonable" for your role.
47% of ProfitEstimated SE Tax Savings
$0
Annual savings vs. Sole Prop.
Tax Liability Comparison
Sole Proprietorship vs. S-Corp Split
Advanced Planning Strategies
Beyond the basic tax split, S-Corps offer specific mechanisms for Health, Retirement, and Timing that require careful execution.
The >2% Shareholder Rule
For S-Corp owners owning more than 2% of shares, health insurance premiums are handled differently than for regular employees. They are not tax-free fringe benefits. However, if structured correctly, you can still deduct 100% of the premiums.
The Critical "Wage Gross-Up"
To take the deduction on your personal 1040, the S-Corp must pay the premium (or reimburse you) and include the amount in your W-2 wages (Box 1 and Box 14).
Correct Reporting Workflow
Company Pays Premium
S-Corp pays insurer directly or reimburses owner via accountable plan.
Report on W-2
Add cost to Box 1 (Wages) and Box 14 (Info). Subject to Income Tax, but exempt from FICA (if plan is qualified).
Deduct on 1040
Owner takes "Self-Employed Health Insurance Deduction" on Schedule 1, offsetting the income tax impact.
Maximizing Contributions
S-Corps open the door to powerful retirement vehicles. The two most common for owners are the SEP-IRA and the Solo 401(k).
SEP-IRA
- Easy to set up.
- Employer contributions only.
- Limit: ~25% of W-2 Salary.
- Must cover all eligible employees equally.
Solo 401(k)
- Higher administration needs.
- Employee (You) + Employer contributions.
- Employee limit: ~$23k ($30k if 50+).
- Employer limit: ~25% of Salary.
- Best for maximizing savings on lower salary.
Limits based on typical 2024/2025 tax figures.
Contribution Power Comparison
Based on your current Salary setting ($70,000)
*Note: Solo 401(k) allows an "Employee" contribution regardless of the 25% cap, making it superior for owners with lower reasonable salaries.
Fringe Benefits Limitations
>2% S-Corp shareholders are treated like partners for fringe benefits. Some benefits that are tax-free for regular employees become taxable income for owners.
Usually Taxable for Owners:
- ✖ Group Term Life Insurance > $50,000
- ✖ Meals & Lodging provided for employer convenience
- ✖ Commuting Benefits / Parking
Year-End Timing Strategies
Since S-Corps are pass-through entities, timing income and expenses directly affects your personal tax bill for the year.
Buy necessary equipment or prepay upcoming bills (rent, insurance) before Dec 31 to lower current year profit.
Delay sending invoices for late-December work until January 1st to push taxable income to the next year.
Pay employee bonuses in December to deduct them now. Ensure owner payroll is sufficient to cover reasonable salary before year-end.