Small Business + S Corp

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.