How to save Taxes with an S Corporation

One of the main reasons for choosing an S corporation over a limited liability company is the possibility to save self-employment taxes.  Members of an LLC have to pay 15.3% self-employment tax on their share of the LLC's income (for the first $94,200).  Shareholders of an S corporation can split the S corporation's earnings into salary and distribution of dividends.  As a result, they only have to pay self-employment tax on the salary.  However, the IRS is on to them and has gotten more aggressive in demanding that you pay yourself a decent salary.  In other words, if you are a cosmetic surgeon in private practice, you won't get away with declaring 30,000 as salary and 500,000 as distribution of dividends.

Talk to your accountant to get his or her opinion on your tax situation.

Stephen L. Nelson, accountant in Redmond, Washington, explains better than I ever could how you could save taxes using an S Corporation.