Small Business + S Corp
Essential tax planning tips and entity structure guidance for growing business owners.
Updated by White Wolf CPA | Last reviewed August 2025
Is it better to have an S corp or an LLC?
It depends on your income and goals. An S corp can reduce self-employment tax, while an LLC offers flexibility. Many business owners start as an LLC and elect S corp status once profitable.
What are the tax advantages of an S corp?
S corps may save thousands in self-employment tax by splitting income between salary and distributions. You also gain access to more advanced tax planning tools.
What is a disadvantage of an S corp?
You must pay yourself a reasonable salary, maintain payroll, and follow stricter IRS compliance rules. It also limits some fringe benefits compared to a C corp.
When should I switch from an LLC to an S corp?
Typically when your business earns $40,000+ in net profit annually. That’s when the self-employment tax savings begin to outweigh the costs of payroll and compliance.
What is the 2% rule for S corp?
It refers to shareholders who own more than 2% of the company. They must include certain fringe benefits, like health insurance, in their taxable wages.
What are estimated tax payments?
Quarterly payments to the IRS based on your expected annual income. If you earn money outside of W-2 wages, you’re likely required to make them.
What is an underpayment penalty?
If you don’t pay enough tax throughout the year via withholdings or estimated payments, the IRS may charge a penalty—even if you pay in full by April 15.
What percentage of income should a self-employed person set aside for taxes?
Set aside 25–35% of your income to cover federal, state, and self-employment taxes. This varies by location and income level.
Who has to make estimated tax payments?
Anyone who expects to owe $1,000 or more in tax after withholdings. This includes business owners, gig workers, athletes, and investors.
When should I switch to an S corp?
The optimal time is when you’re making steady profits and want to reduce self-employment taxes. A CPA can calculate the best timing for your specific income.
How do LLC owners avoid taxes?
You can’t avoid taxes entirely, but with strategic deductions, retirement plans, and potentially an S corp election, you can significantly reduce them legally.
Do LLC owners get taxed twice?
No. LLCs are pass-through entities, so profits are only taxed once at the owner level—unless you opt to be taxed as a C corp.