S Corp Self-Employment Tax: How to Pay Less and Save More

If you're a solopreneur earning $60,000 or more, you could be leaving thousands on the table each year. An S Corp lets you split income into salary and distributions, with only your salary subject to the 15.3% S Corp self-employment tax. This strategic move can save you significant money while keeping you IRS-compliant.

Most solopreneurs earning $60,000 or more are paying self-employment tax on most of their net earnings (about 92.35%), leaving thousands of dollars on the table each year. If staying a sole proprietor or single-member LLC, then you’re likely overpaying when you could be keeping far more of what you earn.

But with Lettuce, you can turn your business into an S Corp in minutes and redirect more of your income back to you. An S Corp acts like a smart filter, letting only your reasonable salary get taxed while the rest flows through as distributions that skip the 15.3% self-employment tax. The result is thousands in yearly savings you can reinvest or take home. Curious how it works? Here’s exactly what it means for you.

What Are Self-Employment Taxes and Why They Matter

Self-employment taxes are how freelancers, contractors, and business owners contribute to Social Security and Medicare. When you work for an employer, these taxes are split and withheld automatically from your paycheck. When you work for yourself, you pay the full 15.3% yourself: 12.4% for Social Security and 2.9% for Medicare. If your income passes the IRS threshold, you also pay an additional 0.9% Medicare tax.

To report this income, you file Schedule C to show your business earnings and expenses, then use Schedule SE to calculate how much self-employment tax you owe. You also make quarterly estimated tax payments in April, June, September, and January to stay compliant. These payments cover both your self-employment tax and your federal income tax.

What Is an S Corp?

An S Corporation, or S Corp, is not a different legal type of business. It is a tax status you elect with the IRS. Most solopreneurs start as sole proprietors or LLCs, then file IRS Form 2553 to be taxed as an S Corp. This lets you split your business income into two parts: a salary you pay yourself through payroll and distributions you can take as profits.

This setup gives you two advantages. First, you still get the liability protection of your LLC. Second, you reduce how much of your income is subject to the 15.3% self-employment tax because only your salary is taxed that way, not your distributions.

Stop Overpaying: How S Corp Slash Self-Employment Tax for Solopreneurs

If you are self-employed, most of your profit over $400 is subject to 15.3% in self-employment tax for Social Security and Medicare. An $80,000 profit means more than $12,000 goes straight to these taxes before income tax is even calculated. Add in quarterly estimated payments, Schedule C, and Schedule SE filings, and it is easy to see why many solopreneurs feel like tax season never ends.

An S Corp changes that. Instead of paying tax on every dollar, you split your income into two parts:

• Your Salary: This is the first portion of your profit, paid as regular wages through payroll. It covers the work you do in the business and is subject to Social Security and Medicare taxes, just like a W-2 paycheck.
• Your Distributions: After payroll is covered and taxes are withheld, any remaining profit can be taken as owner distributions. These do not go through payroll and are not subject to self-employment tax, though you still pay income tax on them.

The IRS requires that your salary be “reasonable,” meaning it should match what someone doing your job would earn in your industry. This keeps you compliant and prevents the IRS from reclassifying your distributions as wages.

For example, if you earn $100,000 and set a $60,000 salary, only that $60,000 is taxed for Social Security and Medicare. The remaining $40,000 avoids the 15.3% tax entirely, saving you more than $6,000 each year (actual savings vary with salary allocation and state taxes). That is money you can reinvest in your business, put toward retirement, or simply keep as take-home pay, all while staying compliant with IRS rules.

Your Path to S Corp Savings

1. Elect S Corp Status: Form an LLC if needed and file IRS Form 2553 to elect S Corp treatment.
2. Separate Your Finances: Open a business bank account and run all income and expenses through it.
3. Set a Reasonable Salary: Choose a salary that reflects what you would pay someone doing your job. *Pro-tip: Lettuce’s AI calculates the ideal number for compliance and savings.*
4. Run Payroll Consistently: Pay yourself on a set schedule, withhold and remit payroll taxes, and generate pay stubs.
5. Take Distributions: Withdraw remaining profits as distributions when cash flow allows. These are not subject to self-employment tax.

Lettuce handles the entire process for you like forming your LLC, filing the election paperwork, setting up banking, calculating salary, running payroll, tracking deductions, and filing your 1120-S, W-2, and K-1. Instead of worrying about quarterly payments or missing a deadline, you focus on growing your business while the savings happen automatically.

How to Become an S Corp Without the Stress

Many freelancers, consultants, and solopreneurs know they are overpaying in taxes but hesitate to make the switch to an S Corp. The process sounds complicated — filing IRS Form 2553, figuring out payroll, calculating quarterly taxes, and staying on top of year-end filings. It can feel easier to keep things as they are, even if that means paying thousands more than necessary every year.

Lettuce removes the complexity and takes care of everything for you. In less than 10 minutes, you can have a fully formed LLC, an S Corp election on file, and a system that runs your back office automatically.

Everything Lettuce Handles For You

• Free LLC Formation and S Corp Election: All paperwork filed on your behalf, including IRS Form 2553 and business bank account setup
• Smart Salary Recommendations: AI calculates the right “reasonable salary” based on your industry, profit level, and IRS compliance standards
• Automated Payroll: Taxes are withheld and paid on schedule, with pay stubs generated and stored for your records
• Quarterly Tax Management: Estimated payments are calculated and paid automatically so you never miss a deadline
• Expense Tracking and Categorization: Every business transaction is imported, categorized, and stored to maximize deductions
• Year-End Filings Done For You: Lettuce prepares and files your 1120-S, W-2, and K-1 so tax season becomes a quick review, not a scramble
• Compliance Monitoring and Audit Defense: Continuous monitoring ensures you stay compliant, and Lettuce stands behind its work with full audit defense coverage

The result? Less time on bookkeeping, no late-night tax panic, and thousands more in your pocket each year.

S Corp Self-Employment Tax: Your Top Questions Answered

Switching to S Corp status is one of the most effective ways for solopreneurs to reduce their tax bill, but it also raises questions. Here are clear, factual answers to the most common concerns so you can make an informed decision with confidence.

Is switching to an S Corp worth it for freelancers in 2025?

Yes. If your net profit is $60,000 or more, an S Corp can deliver significant savings, with the biggest benefits appearing around $80,000 to $100,000 in profit. Instead of paying the 15.3% self-employment tax on most of your net earnings (92.35%), you only pay it on your salary. A $100,000 earner who sets a $60,000 salary could save more than $6,000 each year. The higher your profits, the greater the savings.

How does Lettuce automate S Corp payroll and tax filings?

Lettuce runs your entire S Corp back office automatically. It forms your LLC if needed, files your S Corp election, calculates your reasonable salary, and runs payroll with proper tax withholdings. It also files your quarterly estimated taxes, 1120-S return, W-2, and K-1 on time with no manual work from you.

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What happens if I pay myself too little or too much salary?

The IRS requires a “reasonable salary.” Paying too little can lead to reclassified distributions and costly back taxes. Paying too much means you lose savings by subjecting more income to Social Security and Medicare taxes. Lettuce’s AI uses industry benchmarks and your business data to recommend the optimal salary so you stay compliant while maximizing distributions.

Can I switch back to an LLC if my income drops?

Yes, you can. Your S Corp election can be revoked and usually takes effect the following tax year. Most solopreneurs stay with their S Corp even through slower seasons because the tax savings continue to outweigh the costs. If your profits ever fall far enough that switching back makes sense, Lettuce will flag it and guide you through the process so you are always using the structure that saves you the most money.

Are there any hidden costs or risks with S Corp?

No hidden fees. Lettuce’s monthly cost includes payroll processing, tax filings, compliance monitoring, and audit defense. The main risk is failing to set a reasonable salary, but Lettuce actively prevents this with automated monitoring and alerts so you remain compliant.

Start Saving More: Transform Into a Tax-Optimized S Corp in Minutes

You work hard to grow your business. Now it is time to keep more of what you earn. For solopreneurs earning $60,000 or more, switching to an S Corp can put $5,000 or more back in your pocket every year, depending on your reasonable salary, state taxes, and compliance costs. That is money you can reinvest, save, or take home instead of sending it all to taxes.

Lettuce makes it simple. In under 10 minutes, you can form your LLC, elect S Corp status, and automate payroll and tax filings. Your salary is calculated for compliance, your quarterly taxes are paid automatically, and all filings are handled for you. With real-time savings tracking, complete audit defense, and the Lettuce-back guarantee, there is no risk.

Start your S Corp setup today at Lettuce and see your savings grow.