Are you a Miami business owner operating as a sole proprietor or LLC earning more than $80,000 annually? Maybe you're paying 15.3% self-employment tax on every dollar of profit and wondering if there's a better way? Or perhaps you've heard that S-Corporations can save substantial taxes but aren't sure if the strategy applies to your situation or how to implement it correctly?
You've found exactly the resource you need, and I'm truly glad you're here.
I'm writing this comprehensive guide with one specific purpose: to meet you, introduce Whittmarsh Tax & Accounting, and earn the opportunity to show you how S-Corporation election can save you $10,000 to $50,000+ annually in self-employment taxes—money that stays in your pocket rather than going to the IRS.
We specialize in helping profitable business owners in Miami, Aventura, and throughout South Florida optimize their entity structures through S-Corporation elections—including determining optimal reasonable compensation, implementing compliant payroll systems, maximizing tax savings while maintaining IRS audit protection, and coordinating S-Corp benefits with overall tax planning strategies.
Now, I understand you came here seeking information about S-Corporation tax savings. And I'm absolutely going to deliver that—you'll learn exactly how S-Corps work, how much you can save, what "reasonable compensation" means, how to set up payroll correctly, and whether S-Corp election makes sense for your specific business.
But here's the critical information your current accountant probably isn't sharing: S-Corporation election is one of the single most powerful tax-saving strategies for profitable small business owners, yet most business owners continue operating as sole proprietors or LLCs (taxed as partnerships) paying unnecessary self-employment taxes year after year because their accountant never mentions the S-Corp strategy.
Most profitable small business owners in South Florida are overpaying self-employment taxes by $10,000 to $50,000+ annually because their accountant either doesn't understand S-Corporation planning or finds it easier to prepare simple Schedule C returns rather than coordinating S-Corp elections, payroll setup, and reasonable compensation determinations.
Generic accountants see $150,000 in business profit on your Schedule C, calculate self-employment tax of $22,950 (15.3%), and never mention that S-Corporation election could reduce that to $5,000-$8,000 in payroll taxes—saving you $15,000+ annually with proper structuring.
They either don't know about the strategy, don't want to deal with the additional complexity of S-Corp returns and payroll, or genuinely don't understand how to determine reasonable compensation that satisfies IRS requirements while maximizing tax savings.
That's the problem we solve at Whittmarsh Tax & Accounting.
We don't just prepare basic tax returns showing what you owe. We provide proactive tax planning specifically designed to minimize your tax burden through entity optimization, S-Corporation elections when beneficial, and strategies that keep substantially more money in your pocket rather than sending it to the IRS.
First, I'm going to explain exactly how S-Corporations work and why they provide such dramatic tax savings compared to sole proprietorships and LLCs taxed as partnerships—you'll understand the mechanics of self-employment tax, how S-Corps bypass these taxes, and exactly where the savings come from.
Then, I'm going to walk through the implementation process—when S-Corp election makes sense, how to determine reasonable compensation that satisfies the IRS, how to set up payroll correctly, what additional costs and complexity are involved, and how to coordinate S-Corp benefits with your overall tax situation.
But here's my direct ask: if you're a business owner earning more than $80,000 in annual profit, if you're currently operating as a sole proprietor or LLC, if you're paying substantial self-employment taxes every year, or if your current accountant has never discussed S-Corporation election with you—we need to talk immediately.
Schedule a consultation with Whittmarsh Tax & Accounting, and let's analyze exactly how much S-Corporation election could save you annually and whether the strategy makes sense for your specific business situation.
You can absolutely continue paying 15.3% self-employment tax on all your business profits. But if you're serious about minimizing taxes and keeping more of what you earn—if you want proactive tax planning rather than reactive compliance—we need to have a conversation.
Call us at (305) 790-5604 or book your S-Corporation tax planning consultation here.
Before understanding S-Corporation benefits, you need to understand the self-employment tax problem that affects most small business owners.
What Is Self-Employment Tax?
Self-employment tax is Social Security and Medicare tax for self-employed individuals. Employees pay 7.65% (their half), employers pay 7.65% (employer half), totaling 15.3%. Self-employed individuals pay both halves—the full 15.3%.
Self-Employment Tax Components:
Total: 15.3% on first $168,600, then 2.9% (or 3.8% over thresholds) on additional earnings
Who Pays Self-Employment Tax?
Example of Self-Employment Tax Burden:
Miami business owner operates as sole proprietor:
Additional Income Tax:
After-Tax Income: $96,806
This business owner just paid $21,194 in self-employment taxes that could have been dramatically reduced through S-Corporation election.
The Self-Employment Tax Deduction Doesn't Fix the Problem:
You can deduct 50% of self-employment tax (the "employer" half) as an adjustment to income. However, you're still paying the full 15.3%—you just get to deduct half of it, which only saves you income tax on that deduction (maybe $3,000-$4,000). You're still paying the underlying $21,000+ in self-employment tax.
At Whittmarsh Tax & Accounting, we help business owners understand exactly how much self-employment tax they're paying and quantify the savings available through S-Corporation election. Our comprehensive business tax services include entity optimization analysis for every profitable business client.
S-Corporations provide a simple but powerful strategy: only your W-2 wages are subject to payroll taxes (equivalent to self-employment tax). Distributions of remaining profits are NOT subject to self-employment tax.
S-Corporation Tax Treatment:
Example: Same Business, S-Corporation Treatment
Miami business owner with $150,000 profit elects S-Corp:
Reasonable Compensation Determination:
Tax Calculation:
Wages: $65,000
Distributions: $85,000 ($150,000 profit - $65,000 wages)
Total Federal Taxes:
Compare to Sole Proprietor: $53,194
Annual Tax Savings: $16,049
The business owner just saved $16,049 annually by reducing the amount subject to employment taxes from $150,000 to $65,000—a difference of $85,000 × 15.3% = $13,005 in eliminated employment taxes, plus additional savings from deducting employer portion of payroll taxes.
The Higher Your Profits, The Greater The Savings:
Example: $300,000 Business Profit
As Sole Proprietor:
As S-Corporation:
Annual Savings: $16,700+
The savings increase as profits increase because more profit can be distributed without employment taxes.
The IRS requires S-Corporation owners who perform services for the corporation to pay themselves "reasonable compensation" before taking distributions. This is the most critical—and most scrutinized—aspect of S-Corp planning.
What Is "Reasonable Compensation"?
Reasonable compensation is what you would pay an unrelated third party to perform the same services you perform for your S-Corporation.
IRS Position:
S-Corp owners can't pay themselves $10,000 salary and take $200,000 in distributions when they're performing substantial services worth $100,000. The IRS will reclassify distributions as wages, assess back payroll taxes, penalties, and interest.
Factors IRS Considers:
Reasonable Compensation Methodologies:
1. Industry Comparables:
Research what similar businesses pay for similar positions. Use resources like:
Example:
Miami marketing agency owner performs services including:
Research shows marketing agency principals earn $80,000-$120,000 in Miami market. Reasonable compensation likely falls in this range.
2. Risk and Return Analysis:
Allocate return between reasonable compensation for services and return on capital investment.
Example:
Business generates $200,000 profit:
This supports $80,000 reasonable compensation with $120,000 distributions.
3. Percentage of Profits:
While no safe harbor exists, many practitioners use 30-40% of profits as starting point for reasonable compensation, adjusted based on specific circumstances.
Example:
Business with $150,000 profit:
What's Too Low:
What's Too High:
While you can pay yourself more than reasonable compensation, it doesn't provide additional tax benefit—you're just paying more payroll taxes than necessary.
Documentation Requirements:
Maintain documentation supporting reasonable compensation determination:
Annual Review:
Reasonable compensation should be reviewed annually as business profits change, owner responsibilities evolve, and market rates adjust.
At Whittmarsh Tax & Accounting, we determine reasonable compensation for our S-Corp clients using industry data, comparable analysis, and defensible methodologies that maximize tax savings while maintaining full IRS audit protection. We document the determination process and adjust annually based on changing circumstances.
S-Corporation election isn't optimal for every business. Understanding when it makes sense requires analyzing your specific situation.
S-Corp Election Makes Sense When:
1. Business Profits Exceed $80,000+ Annually
Below $80,000, the payroll tax savings might not justify the additional costs and complexity. Above $80,000, savings typically exceed costs substantially.
Example:
$60,000 profit business:
$150,000 profit business:
2. You're Actively Working in the Business
S-Corp strategies work best when owner provides substantial services. For passive investments generating income without active work, S-Corp election might not provide benefits.
3. Profits Are Relatively Stable
S-Corp elections work best with consistent, predictable profits. Highly variable profits make reasonable compensation determination and payroll planning difficult.
4. You Can Handle Additional Compliance
S-Corps require:
If you can't handle or aren't willing to handle these requirements, S-Corp might not be optimal.
S-Corp Election Might NOT Make Sense When:
1. Profits Are Too Low
Below $60,000-$80,000, costs might exceed savings.
2. You Want to Reinvest All Profits
If you want to retain all earnings in the business rather than taking distributions, S-Corp election might not provide significant benefits (though other factors might still make it worthwhile).
3. You Have Significant Business Losses
S-Corp losses pass through to personal returns like LLC losses, but setting up S-Corp infrastructure during loss years might not make sense. Wait until profitability to convert.
4. You Want Flexible Ownership Structure
S-Corps have ownership restrictions:
If you need flexible ownership or foreign investors, S-Corp might not work.
5. You Need Significant Basis for Loss Deductions
S-Corp shareholders get basis only for capital contributions and loans to corporation (not loans to shareholders). For businesses expecting losses, partnership taxation might provide better basis treatment.
The Calculation:
Tax Savings vs. Additional Costs
Tax Savings:
Additional Costs:
Example:
$120,000 profit business considering S-Corp:
This makes sense—$7,945 annual savings justifies the additional complexity.
At Whittmarsh Tax & Accounting, we perform comprehensive S-Corp election analysis for every profitable business client, quantifying exact savings versus costs for their specific situation. We recommend S-Corp only when the net benefit clearly justifies the additional requirements.
Once you've determined S-Corp election makes sense, proper implementation is critical.
Step 1: Entity Formation (If Needed)
If you're currently a sole proprietor, you'll need to form a legal entity:
Option A: Form New Corporation
Option B: Form LLC, Then Elect S-Corp Status
Most Common: Form LLC, elect S-Corp taxation. This provides LLC's liability protection and operational flexibility while receiving S-Corp tax treatment.
Step 2: File Form 2553 (S-Corporation Election)
IRS Form 2553 elects S-Corporation status. Filing deadlines:
For New Entities:
For Existing Entities:
Form 2553 Requirements:
Step 3: Set Up Payroll System
S-Corps must run payroll for owner-employees:
Payroll Setup:
Payroll Service Recommendations:
Costs: $40-$150+ per month depending on service and frequency
Step 4: Determine Reasonable Compensation
Work with your CPA to determine defensible reasonable compensation using methodologies discussed earlier. Document the determination.
Step 5: Set Payroll Schedule
Determine how frequently to pay yourself:
Options:
Payroll Tax Deposits:
Federal payroll taxes must be deposited:
Step 6: File Quarterly Payroll Reports
Form 941 (Employer's Quarterly Federal Tax Return):
State Returns: If applicable (Florida doesn't have state income tax)
Step 7: Year-End Payroll Reporting
W-2 Forms:
Form 940 (Federal Unemployment Tax):
Step 8: Prepare S-Corp Tax Return
Form 1120-S (U.S. Income Tax Return for an S Corporation):
Schedule K-1:
Step 9: Take Distributions
After paying reasonable compensation, remaining profits can be distributed:
Distribution Methods:
Important: Maintain corporate formalities—document distributions in corporate records, don't just transfer money casually.
At Whittmarsh Tax & Accounting, we guide clients through the complete S-Corp election process, coordinate entity formation with business attorneys when needed, file Form 2553, set up payroll systems, determine reasonable compensation, and handle all S-Corp tax return preparation. We make the transition seamless while ensuring compliance and maximum tax savings.
S-Corporation election provides powerful benefits when implemented correctly, but common mistakes create IRS problems and reduce savings.
Mistake 1: No Salary/Inadequate Salary
Taking zero salary or obviously inadequate salary ($10,000 on $200,000 profit) is the most common and most problematic mistake.
IRS Response:
Example:
Business owner takes $15,000 salary and $135,000 distributions on $150,000 profit. IRS audits, determines reasonable compensation should be $70,000:
Solution: Pay reasonable compensation based on defensible methodology and document the determination.
Mistake 2: Excessive Salary
While less problematic, paying yourself more than necessary as salary just means paying more payroll taxes than required.
Example:
Business owner could justify $70,000 reasonable compensation but pays $110,000 salary and takes $40,000 distribution on $150,000 profit:
Mistake 3: Not Running Payroll Properly
Some S-Corp owners just transfer money and call it "salary" without actually processing payroll, withholding taxes, making deposits, or filing returns.
Problems:
Solution: Implement proper payroll system with deposits, returns, and W-2s.
Mistake 4: Ignoring Basis Limitations
S-Corp shareholders can only deduct losses to the extent of basis (capital contributions plus loans to corporation). Taking distributions in excess of basis creates taxable income.
Example:
Shareholder has $50,000 basis, takes $70,000 distribution:
Many S-Corp owners don't track basis, creating problems years later when distributions exceed basis or losses can't be deducted.
Solution: Maintain annual basis calculations tracking contributions, income, distributions, and losses.
Mistake 5: Mixing Personal and Business Funds
S-Corps require maintaining separate bank accounts and corporate formalities. Mixing personal and business transactions ("piercing the corporate veil") can eliminate liability protection and create tax problems.
Solution: Maintain strict separation between corporate and personal finances.
Mistake 6: Missing Payroll Tax Deposits
Failing to deposit payroll taxes on time creates steep penalties—potentially 15% of unpaid amount.
Solution: Ensure timely payroll tax deposits (typically monthly for small businesses) or use payroll service that handles deposits automatically.
Mistake 7: Late S-Corp Election
Missing the Form 2553 filing deadline means waiting another full year before S-Corp status takes effect.
Example:
Business owner decides in May 2024 to elect S-Corp for 2024. The deadline was March 15, 2024—election now applies to 2025, not 2024.
Solution: Plan S-Corp elections well in advance and file Form 2553 timely. Late election relief is available in some circumstances but requires demonstrating reasonable cause.
Mistake 8: Violating S-Corp Eligibility Rules
Inadvertently violating eligibility rules (adding ineligible shareholder, creating second class of stock) automatically terminates S-Corp status.
Solution: Understand eligibility requirements and maintain compliance.
At Whittmarsh Tax & Accounting, we help S-Corp clients avoid these common mistakes through proper implementation, ongoing compliance monitoring, reasonable compensation review, and comprehensive S-Corp administration.
Once you've implemented basic S-Corp election, additional strategies can multiply benefits.
Strategy 1: Augusta Rule for S-Corp Owners
The Augusta Rule (Section 280A) allows homeowners to rent their homes to businesses for up to 14 days annually tax-free. S-Corp owners can use this:
How It Works:
Example:
S-Corp rents owner's home for quarterly board meetings and annual planning retreat:
Strategy 2: Employing Children
S-Corps can employ owner's children, creating tax benefits:
Benefits:
Requirements:
Example:
S-Corp hires owner's 16-year-old for administrative work:
Strategy 3: Accountable Plan for Expense Reimbursements
S-Corps can establish accountable plans allowing tax-free reimbursement of business expenses:
Covered Expenses:
Benefits:
Requirements:
Strategy 4: Health Insurance Deduction
S-Corp owners can deduct health insurance premiums, but treatment differs from traditional employees:
S-Corp Process:
Benefit: Health insurance effectively deductible while avoiding payroll taxes on the reimbursement amount.
Strategy 5: Retirement Plan Contributions
S-Corp owners can establish retirement plans with substantial contribution limits:
Options:
Benefit: S-Corp deducts contributions, reducing taxable income, while owner builds retirement savings.
At Whittmarsh Tax & Accounting, we implement these advanced S-Corp strategies for clients who can benefit, multiplying tax savings beyond basic S-Corp election while maintaining full compliance.
Let's work through complete examples showing exact S-Corp savings.
Example 1: $100,000 Profit Business
Sole Proprietor Treatment:
S-Corporation Treatment:
Annual Savings: $6,480
Over 10 years: $64,800
Example 2: $200,000 Profit Business
Sole Proprietor:
S-Corporation:
Annual Savings: $9,995
Over 10 years: $99,950
Example 3: $300,000 Profit Business
Sole Proprietor:
S-Corporation:
Annual Savings: $7,170
Plus additional savings from employer payroll tax deduction not available to sole proprietors.
Additional Costs:
Net Savings: $5,170+
These are conservative estimates—actual savings often exceed these amounts when all factors are considered.
How much profit do I need before S-Corp makes sense?
Generally $80,000+ in annual profit. Below this, the administrative costs and complexity might not justify the tax savings. However, each situation is unique—we analyze your specific circumstances to determine if S-Corp election is beneficial. At Whittmarsh Tax & Accounting, we perform detailed cost-benefit analysis for every business owner considering S-Corp election.
Can I elect S-Corp status anytime during the year?
The deadline is March 15 for calendar-year taxpayers (2 months and 15 days after year start). Missing this deadline means waiting until the following year. However, late election relief is available if you can demonstrate reasonable cause for missing the deadline. We help clients file timely elections and pursue late relief when necessary.
What's a reasonable salary for my industry?
This depends on your specific role, responsibilities, experience, and geographic market. We use Bureau of Labor Statistics data, industry salary surveys, and comparable business analysis to determine defensible reasonable compensation for your situation. Documentation is key—we maintain records supporting the determination to withstand IRS scrutiny.
Do I need to pay myself the same amount every month?
No, you can adjust salary throughout the year based on business cash flow and profit projections. However, you should pay reasonable total annual compensation. Many S-Corp owners pay monthly or quarterly salary with annual review and adjustment as needed.
Can I convert my existing LLC to S-Corp status?
Yes, existing LLCs can elect S-Corp taxation by filing Form 2553. The LLC remains the legal entity but is taxed as S-Corp. This is often simpler than forming a new corporation and provides LLC operational flexibility with S-Corp tax benefits.
What if I take distributions that exceed my basis?
Distributions exceeding basis are taxable as capital gains. You need to track basis annually (starting with capital contributions, adding income, subtracting losses and distributions). Proper basis tracking prevents unexpected tax liabilities when taking distributions.
Can my S-Corp have losses?
Yes, S-Corp losses pass through to shareholders similar to LLC/partnership losses. However, loss deductions are limited to basis, and passive activity loss rules might apply depending on your participation. During loss years, you don't have reasonable compensation concerns since there's no profit to distribute.
Does S-Corp election affect my self-employment tax deduction on QBI?
S-Corp wages and guaranteed payments reduce the Qualified Business Income available for the 20% Section 199A deduction. However, the self-employment tax savings typically far exceed any reduction in QBI deduction. We model both scenarios to ensure S-Corp election provides net benefit.
Can I elect S-Corp status for just one of my businesses?
Yes, if you operate multiple businesses, you can elect S-Corp status for some and not others. We analyze each business separately to determine optimal structure for each entity.
What happens if I don't pay myself reasonable compensation?
IRS can reclassify distributions as wages, assess back payroll taxes plus penalties and interest. In egregious cases, this can result in tens of thousands in unexpected liabilities. Proper reasonable compensation determination with documentation is essential.
You now understand how S-Corporation election can save you $10,000 to $50,000+ annually in self-employment taxes. The question is: what will you do with this knowledge?
You have two clear options:
Option 1: Continue operating as a sole proprietor or LLC, paying 15.3% self-employment tax on all your business profits, and leaving $10,000-$50,000+ annually on the table because your accountant never mentioned S-Corp strategy or you thought it was "too complicated."
Option 2: Schedule a consultation with Whittmarsh Tax & Accounting and get comprehensive S-Corp election analysis. We'll quantify exactly how much you'd save, determine optimal reasonable compensation, evaluate whether your business profile makes S-Corp beneficial, and implement the election correctly if it makes sense.
The consultation is straightforward. We'll review your business income and structure, calculate potential tax savings, explain implementation requirements, identify any issues that would make S-Corp problematic, and provide specific recommendations.
For most profitable business owners, S-Corporation election is the single highest-ROI tax strategy available—saving multiples of our fees annually.
Book your S-Corporation planning consultation: https://www.whittmarsh.com/pricing-how-it-works
Our Aventura office specializes in serving profitable business owners throughout South Florida. We've helped hundreds of business owners implement S-Corp elections, saving them millions cumulatively in unnecessary self-employment taxes.
We specifically target profitable business owners who need proactive tax planning beyond basic compliance. Our ideal clients include:
We provide comprehensive business tax services including:
Our mission is helping South Florida business owners minimize taxes legally and ethically through entity optimization, proactive planning, and strategies that keep substantially more money in their pockets.
If you're a profitable business owner, S-Corporation planning isn't optional—it's likely the single most valuable tax strategy available to you.
Visit us online at www.whittmarsh.com
Whittmarsh Tax & Accounting serves business owners throughout Miami, Aventura, Fort Lauderdale, and all of South Florida. We specialize in S-Corporation election, reasonable compensation determination, entity optimization, and proactive tax planning that dramatically reduces tax burdens for profitable businesses.