How Does An S-Corporation Save Me Money?

If you have read our post about S-Corporations and determining a reasonable salary, you’re probably wondering how S-Corps help save you money.

Because it’s a requirement to pay yourself a reasonable salary when operating an S-Corp, savings on your taxes comes into play when your reasonable salary is more than your net income. This lets you take a distribution.

Distributions are amounts of cash that you can take out of your business. Distributions are not subject to payroll taxes so by taking a distribution, you save by not paying payroll taxes on that amount of money.

When told about this, most clients ask, “I can just lower my salary then, right?” The answer is: Nope. You are required to have reasonable compensation, which is discussed in the blog post.

After your reasonable compensation is taken care of, you’re good to go to make distributions.

Another big savings item we see is on the health insurance side. If you need to purchase your own health insurance as an S-Corporation, you can purchase it through your business instead of the individual exchange. This often results in you being able to buy better insurance.

However, we do recommend that you talk to an insurance broker before you make any decisions about your health insurance since we do not provide those services.

The last area in which we see savings for our S-Corp clients is when we are putting an accountability and reimbursement plan into place. Depending on your business, we can help you set up a plan to pay for things like your cell phone and mileage. However, this area of savings is very business-specific and depends on the type of business you do.

Should Everyone Be an S-Corporation?

No. An S-Corp is a more complicated form of business that requires you to set up payroll. Becoming an S-Corp also depends on how much money the business is making and your personal tax situation. We have covered some minimums in this post.

TL;DR: Being an S-Corporation can save you money — if you hit the minimum income threshold and set things up correctly.

What is an EIN and Why Do I Need One?

An EIN is a nine-digit number assigned by the IRS and used to identify your business. It’s like a Social Security number for your business and, in many cases, can be used in place of your Social Security number on forms and other types of paperwork.

We recommend that all businesses apply for and use an EIN..

If you are a sole proprietor, you need an EIN if you have any of the following:

  • Employees
  • A retirement plan,
  • Have or are planning to buy an existing business
  • You are a partnership, LLC, or PLLC

In addition, some states require you to have an EIN to open a bank account.

To apply for an EIN, the only information you need is the type of company your business or practice is. Applying for an EIN is an online process that, in most cases, will provide you your EIN on the same day you apply for it.

When applying, PLLCs should select the “LLC” option on the application. When you are done, make sure you SAVE a copy of the generated letter. It is the ONLY time you will get a copy without requesting it from the IRS.

TL;DR: You should have an EIN.

How much should I pay myself?

It depends.

No, really — it does.

I ask each client a handful of questions when trying to determine how much they should compensate themselves:

  • What industry are you in?
  • How much work do you do?
  • Do you have any employees?
  • How much money are you currently making?
  • Are you a PLLC or LLC?
  • Are you an S-Corp? (The below information does not apply to S-Corps because S-Corps require a reasonable compensation.)

Generally, I’ll look into your records and cash flow to help determine your salary.  However, the following chart works well as a general outline to determine your compensation, especially for service-based businesses like a Therapy Practice, Massage Therapist, or Chiropractor.

Income Between Recommended Compensation
$0 to > $250,000 50%
$250,000 to $500,000 35%
$500,000 & Up We should talk


What if I can’t afford to pay myself in those ranges?

It might be time to dig into your expenses and see what you are spending money on. When looking at your expenses, ask yourself: is this required or does this bring in clients?

If the answer is no, should you really be spending money on it?

TL;DR: Figuring out what you should pay yourself is difficult. To determine your salary and compensation, speak with a professional for advice.