Can I Reduce My Tax Bill by Forming an S-Corporation?

Forming an S-Corp can reduce your self-employment taxes, but only if your business is profitable enough to make it worthwhile. As an S-Corp owner-employee, you pay yourself a "reasonable salary" subject to payroll taxes, and take additional profits as distributions that aren't subject to the 15.3% self-employment tax. For example, if your business earns $150,000 and you pay yourself a $75,000 salary, you only pay self-employment taxes on $75,000 instead of all $150,000. However, S-Corps come with added costs — payroll setup, quarterly filings, and potentially a CPA — that often run $2,000–$5,000 per year. The strategy typically makes sense when your net profit exceeds $50,000–$60,000 per year.