How an S-Corp Election Can Save Small Business Owners Thousands

Contractor working on a home remodeling project

How One Small Business Owner Saved Thousands in Taxes Every Year

Today, I want to share a story about someone I met who taught me just how much money small businesses can save on taxes with the right strategy. This experience sparked my passion for helping small business owners because I saw firsthand the immediate difference I could make.

While I was working in corporate, I met a contractor who was doing really well—he was making $250,000 a year remodeling homes all on his own. As we got to talking about his taxes and accounting, he opened up about how unhappy he was with his CPA, who had been working with him for 10 years. His biggest complaints? The CPA was unresponsive and never reached out to check on him throughout the year.

Since I’m a CPA and have a background in public accounting, I asked him about his business setup and how long he’d been this successful. That’s when I found out he’d been earning six figures for a decade, running his business as a sole-member LLC, but he had never switched to S-Corp status.

What Does That Mean?

For anyone unfamiliar, a sole-member LLC means you’ve formed an LLC (Limited Liability Company), but your business income is taxed as part of your personal taxes (1040). It’s reported on something called Schedule C, which is part of your personal tax return. This setup is great when you’re starting out or earning less, but as your business income grows, it can cost you more in taxes than it needs to.

That’s where an S-Corp election comes in.

Why Is an S-Corp Better for Some Businesses?

Here’s the big difference:

As a sole-member LLC, you pay self-employment taxes on virtually all your business profits. That’s Social Security (12.4%) on your income up to $160,200 (for 2023) and Medicare (2.9%) on all your income. Together, that’s 15.3% on your profits—a big chunk of money.

With an S-Corp, the rules change. Instead of paying self-employment taxes on everything, you pay yourself a reasonable salary for the work you do in the business. That salary is taxed for Social Security and Medicare, just like it would be for any employee. But the rest of your business profits—what’s called distributions—are not taxed for Social Security or Medicare. You still pay income tax on the distributions, but you save money by avoiding those extra payroll taxes.

Back to the Story

This contractor I met had been paying almost $30,000 a year in self-employment taxes because he was still filing as a sole-member LLC. That’s a lot of money to hand over every year! When I explained how an S-Corp could cut those taxes in half, he was on board.

The next year, after he made the switch, his employment taxes dropped to about $15,000. That’s $15,000 saved every year! And the best part? He continues to save that money every single year by keeping his S-Corp status.

The Lesson Here

Stories like this show how much money you can save just by structuring your business the right way. This contractor could have saved tens of thousands of dollars over the years if someone had given him this advice earlier. So, why didn’t his CPA tell him? Unfortunately, his CPA was just preparing his taxes, not proactively looking for ways to save him money. They weren’t doing any tax planning—and that’s a huge, missed opportunity.

Why Tax Planning Matters

If you’re a small business owner, it’s critical to meet with your tax professional during the year—not just at tax time. A good CPA will help you plan ahead and can potentially find strategies to lower your tax bill. Simple adjustments, like switching to an S-Corp, can make a massive difference.

If you’re wondering whether an S-Corp or other strategies might help you save on taxes, I’d love to help. Let’s schedule a free consultation to review your situation and see how you can keep more of your hard-earned money.

Disclosure

This article is for informational purposes only and is based on a story of a taxpayer who saved thousands on taxes. It is not tax advice. I do not know your specific tax situation, so this strategy may or may not work for you. For personalized tax advice, please schedule a consultation with a qualified tax professional.

Peyton Witt, CPA

Tax Pilot, LLC

peytonwitt1@taxpilotllc.com

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