How S-Corps Save on Self-Employment Taxes (and Where They Don’t)

One of the biggest reasons Fort Worth business owners consider electing S-Corp status is the potential savings on self-employment taxes. If you’ve ever felt frustrated watching a huge chunk of your profits disappear into Social Security and Medicare, you’re not alone. The S-Corp election is designed to help reduce that burden.

But here’s the catch: while S-Corps can definitely save you money, the savings aren’t unlimited. There are clear rules about how it works, and situations where it doesn’t. 

Let’s break it down.

A Quick Refresher on Self-Employment Taxes

When you operate as a sole proprietor or an LLC, all of your profit is subject to self-employment tax. That’s 15.3% for Social Security and Medicare combined.

So if your Fort Worth business nets $100,000 in profit, you’ll owe about $15,300 in self-employment tax on top of your regular federal income taxes.

This is where the S-Corp election changes the math.

How the S-Corp Structure Cuts the Tax Bill

With an S-Corp, you must pay yourself a reasonable salary through payroll. That salary is subject to payroll taxes (which cover Social Security and Medicare).

But here’s the key: any leftover profit you take out as a distribution is not subject to payroll tax. You’ll still pay regular federal income tax, but you won’t pay the 15.3% self-employment tax on those dollars.

Example:

Imagine your Fort Worth consulting firm nets $120,000 in profit. As an S-Corp, you decide to pay yourself a reasonable salary of $70,000. That $70,000 is subject to payroll taxes.

The remaining $50,000? You can take that as a distribution. You’ll pay federal income tax, but no additional self-employment tax. That single decision saves you over $7,500 in payroll taxes.

Where the Savings Stop

S-Corps aren’t a magic loophole. There are limits to how much you can save.

1. Your Salary Must Be Reasonable
   If you try to pay yourself only $10,000 when your business makes $200,000, the IRS will notice. They can reclassify your distributions as wages and hit you with back taxes and penalties.
   
2. You Still Pay Payroll Taxes on Salary
   Even with an S-Corp, the portion you pay yourself as salary is still subject to Social Security and Medicare. The election only helps with the profit you take as distributions.
   
3. Net Investment Income Tax (NIIT)
   High earners may still face the 3.8% NIIT on distributions once income crosses certain thresholds. For married couples filing jointly, that kicks in at $250,000.
   
4. Extra Admin Costs Eat Into Savings
   Running payroll, filing an extra tax return, and maintaining compliance come with costs. If your profits are too low, those costs can cancel out the tax benefit.
   

Texas Advantage

Since Texas doesn’t have a state income tax, the self-employment tax savings from an S-Corp are purely federal. That makes the election especially attractive for Fort Worth business owners with strong profits. Unlike states with high income taxes, you don’t have to worry about offsetting those state rules.

When It Works Best

S-Corp savings are most impactful when:

• Your business nets at least $60,000 in consistent profit
• You’re ready to pay yourself a reasonable salary
• You have systems in place (or a CPA) to handle payroll and compliance
  

The Short Story

S-Corps can put thousands of dollars back in your pocket every year by reducing self-employment taxes. But the savings only come when you follow the rules. Salary must be reasonable, payroll must be handled properly, and profits need to be high enough to outweigh the added costs.

For Fort Worth business owners consistently earning into the six figures, the S-Corp election can be one of the smartest tax strategies available. 

For those still building, it may be worth waiting until the timing is right.