When should a self-employed person consider an S-corp?

The question usually comes up in the second year of working for yourself. Here's the answer without the magic.

What it gives you

It's about one tax: the 15.3% self-employment tax. On Schedule C it applies to all of your net profit. In an S-corp you pay yourself a salary, the 15.3% applies only to that salary, and the rest comes out as distributions.

Where the threshold is

A rough guide is net profit consistently above about $80,000 a year. Below that, the savings don't cover what gets added.

And a lot gets added

• A separate business tax return
• Real payroll: withholding, deposits, quarterly reports, W-2s in January
• Reasonable compensation: your salary can't be a token amount, and this is exactly what the IRS looks at
• In California, 1.5% of the company's income, with an $800 annual minimum regardless of results

The main mistake

Switching to an S-corp and not paying yourself a salary. It's the first thing examiners check, and it costs more than never switching at all.

The second mistake

Running the numbers from someone else's example. The savings depend on your profit, your state and whether you have employees. What worked for your neighbor may not work for you.