January 21, 2025
Tax season is here, and if you're self-employed, you've probably wondered if you're paying too much in taxes.
For 1099 contractors, real estate agents, and other self-employed professionals, forming an S-Corp could be the game-changer you need to save thousands of dollars. In fact, Formations customers saved an average of $14,801 on their taxes last year by following our playbook.
Take a look at how an S-Corp can help you maximize your income and minimize your tax burden.
The Tax Problem for the Self-Employed
When you're self-employed, you’re responsible for both the employer AND employee portions of Social Security and Medicare taxes. This can add up to 15.3% of your net income, which is double what a W2 employee pays. For someone earning $80,000 a year, that’s over $12,000 in taxes, just for self-employment. And this doesn’t even include federal or state income taxes. It adds up quickly!
How an S-Corp Saves You Money
Reasonable Salary: As an S-Corp owner, you’ll pay yourself a reasonable salary. This portion of your income is subject to payroll taxes, but the remaining profits can be distributed as dividends.
For example, if you earn $100,000 and allocate $50,000 as a reasonable salary, only this $50,000 will incur payroll taxes. The remaining $50,000 in distributions is not subject to Social Security or Medicare taxes, potentially saving you over $7,500.
Distributions: Additional profits can be taken as "owner distributions", which are taxed at a lower rate than ordinary income. This is a huge advantage over sole proprietorships or partnerships, where all income is subject to self-employment taxes.
Real-World Example
Meet Steven Cozza, a real estate agent who transitioned to an S-Corp with Formations’ assistance. By restructuring his business, Steven optimized his tax situation and streamlined his financial management. He shares, "I recommend Formations to everyone I know who operates a small business, especially agents." Learn more in Steven’s case study.
See What You Could Save!
Ready to stop overpaying on taxes? Formations can help. Check out our free tax calculator that will show you which strategies can save you money next tax season.
