The Tax Tug-of-War: That could save you thousands on payroll taxes

Imagine this: you’re an elite sales pro crushing it with a side hustle. Revenue is rolling in, but so is the tax bill. Every time you file your taxes, Uncle Sam takes a big bite. 

You start thinking, How can I keep more of what I earn?

The answer might be in five little letters: S-Corp. 

Many entrepreneurs overlook this powerful tax-saving tool, but for high-income earners like you, it could mean thousands of dollars in payroll tax savings each year. 

Let’s break it down step by step so you can decide if this move is right for you.

What Is an S-Corp Election?

An S-Corp isn’t a type of business—it’s a tax status you can choose for your business. If you’re currently running a sole proprietorship or an LLC, you report all your profits on your personal tax return (Schedule C). But when you elect to be taxed as an S-Corp, you split your business income into two parts:

1. A salary you pay yourself as an employee.

2. Distributions (profits) that flow to you as the business owner.

Here’s the magic: only your salary is subject to payroll taxes like Social Security and Medicare. The rest? It skips those taxes entirely.

How an S-Corp Saves You on Payroll Taxes

Let’s do the math.

• As a sole proprietor (Schedule C), all your profit is hit with 15.3% in payroll taxes—on top of income tax.

• As an S-Corp, you pay payroll taxes only on the salary portion. The rest is free from that extra 15.3%.

Let’s look at an example. Say your business makes $200,000 in profit.

• As a sole proprietor: You owe $30,600 in payroll taxes.

• As an S-Corp: If you pay yourself a reasonable salary of $100,000, you only owe $15,300 in payroll taxes. The other $100,000 avoids them entirely.

That’s $15,300 in savings just by making an S-Corp election.

When Should Your Business Elect S-Corp Status?

An S-Corp isn’t right for every business. Here’s when it might make sense for you:

1. You’re making over $100,000 in profit. Below that, the extra costs of operating as an S-Corp (like payroll software, filing fees, and tax prep) might cancel out the savings.

2. You’re disciplined about finances. Running an S-Corp means keeping clean books, filing payroll taxes on time, and paying yourself a “reasonable salary.”

3. You plan to grow. If your side hustle is scaling fast, the S-Corp savings multiply as your profits rise.

When to Stick with Schedule C

Sometimes, staying a sole proprietor is the smarter move. Here’s when that’s the case:

• Your business profits are low. If you’re not consistently earning at least $40,000-$50,000, the S-Corp costs might outweigh the savings.

• You’re not ready for the paperwork. S-Corps require more record-keeping and compliance. If you’re not up for it, it’s okay to wait.

Common Pitfalls to Avoid

Switching to an S-Corp can save you money, but only if you follow the rules. Here are the top mistakes to steer clear of:

1. Paying yourself too little. The IRS requires you to take a “reasonable salary.” If you pay yourself $10,000 while your business earns $300,000, they’ll come knocking.

2. Skipping payroll taxes. You still owe payroll taxes on your salary, and these payments need to happen regularly.

3. Ignoring extra costs. Filing an S-Corp tax return and running payroll come with fees. Make sure the savings outweigh the costs.

Conclusion

An S-Corp can be a game-changer for high-earning sales pros with side businesses. By splitting your income into salary and distributions, you could save thousands on payroll taxes. But timing and execution matter. Jumping in too soon or cutting corners can cost you more in the long run.

If you’re unsure whether an S-Corp is right for you, let’s talk! I specialize in helping elite sales professionals like you keep more of their hard-earned money through smart tax strategies. Schedule a call today, and let’s build a plan that works for you.

Because you’ve worked hard to close those deals—don’t let taxes close in on your profits.

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.