S-Corp Optimization: Salary vs. Distributions to Minimize Self-Employment Tax

When you own a small business, one of the biggest expenses you’ll face is self-employment tax. Choosing the right structure can save you thousands each year.


How It Works:

  • As a sole proprietor or single-member LLC, all your net earnings are subject to self-employment tax (Social Security + Medicare = 15.3%).
  • By electing S-Corporation status, you can split your income into:
  • Reasonable Salary (subject to payroll taxes).
  • Distributions (not subject to self-employment tax).


Example:
If your business earns $100,000:

  • Sole proprietor: Entire $100,000 subject to SE tax.
  • S-Corp (with $60,000 salary + $40,000 distribution): Only $60,000 subject to SE tax.



Result: Thousands in tax savings, legally.


Key Considerations:

  • You must pay yourself a “reasonable” salary.
  • Payroll compliance is required (W-2s, payroll filings).
  • Best used when profits exceed $50,000 annually.



👉 Pro Tip: Pair S-Corp status with retirement contributions (like a Solo 401(k)) to maximize savings.