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.
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!
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.
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.