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.