Should You Form an S-Corporation to Save on Income Taxes?
If you are operating a business, Tummel & Casso should be consulted to help determine the right structure for your entity. While some operate as sole proprietors and the business thus has no separate legal identity, many entrepreneurs and self-employed individuals can benefit greatly from forming an S-corporation. 
An S-corporation allows for small business owners to achieve certain protections from liability and can limit personal responsibility for business debts. Since the business is a separate legal entity, the business is distinct from the individual who owns it. An S-corporation can also help a small business owner to achieve tax savings.
Is Forming an S-Corporation the Right Step to Take?
S-corporations, unlike C-corporations, allow for pass-through taxation. This means that income and losses from the S-corporation can be claimed on the individual business owner’s tax returns. An S-corporation thus allows for business owners to avoid the potential double taxation that can go along with forming a C-corp (since the business pays taxes on a C-corp’s profits, and the owners also pay taxes when dividends are issued).
Although income and losses pass through to individual business owners, an s-corporation can still allow for significant tax savings by reducing the amount an individual owner is required to pay in payroll taxes. Payroll taxes include payments to Medicare and payments to Social Security. The self-employed pay out 15 percent in payroll taxes since no portion of their taxes are covered by a separate employer as they are for those who earn traditional W-2 wages.
When you form an s-corporation, however, you can pay yourself a salary that is equal to just a portion of the money the S-corporation makes. You can use the remainder of the money to pay out to yourself in periodic distributions. This allows you to avoid paying payroll taxes on a portion of the money earned that is distributed in distributions.
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