Taxes & Entities

S Corporations

An S corporation is a tax election — not a legal entity — that can cut a profitable owner's self-employment tax by splitting income into salary and distributions. It teaches that legal form and tax treatment are separate dials, and that every tax optimization only pays above a threshold.

  • Beginner
  • 8 min total
  • 11 chapters

What decision this helps you make: Whether the S-corp election's self-employment-tax savings exceed its added costs for your profit level — and how the reasonable-salary rule bounds the benefit.

What this topic is

A federal tax election (not a separate entity) an eligible LLC or corporation can make, letting owner-employees split income into a reasonable salary (payroll-taxed) and distributions (not self-employment-taxed).

Why it matters

It's the most common small-business tax optimization — real savings above a profit threshold — and it cleanly demonstrates that legal wrapper and tax treatment are separate choices.

Who should learn it

Profitable owner-operators weighing whether to elect S-corp taxation, and anyone learning how tax elections layer onto legal entities.

What you will understand

  • An S-corp is a tax election, not a legal entity
  • It splits income into salary (payroll-taxed) and distributions (not SE-taxed)
  • The salary must be "reasonable" — a token salary is an audit target
  • It pays only above a profit threshold, after real added costs

Prerequisites

Common misconception

"An S-corp is a type of company I should form instead of an LLC." An S-corp is a tax election, not a competing legal entity — your LLC can elect to be taxed as one while staying an LLC. And it's not free money: the savings come from the distribution portion, bounded by the reasonable-salary rule, minus real added costs — so it pays only above a profit threshold, not for everyone.