Switching to S Corp status is a game-changer for solopreneurs, and here's why: once your business profits surpass $80,000 annually, you're in a prime position to eliminate 15.3% in self-employment tax on profit distributions above a reasonable salary. Today's modern platforms do all the heavy lifting, automating your setup, payroll, and compliance, allowing you to unlock significant tax savings and keep more of your hard-earned money without the added stress.
Are you paying $8,000 more in taxes than you need to? Most successful solopreneurs are doing exactly that, missing out on one of the biggest tax advantages available to businesses-of-one. While you're focused on delivering amazing work to your clients, the IRS automatically collects 15.3% self-employment tax on every dollar of your profit, money that S Corp owners get to keep. The difference isn't small change; thousands of dollars could be used to fund your next creative project, upgrade your equipment, or stay in your pocket where it belongs.
The solution lies in how S corp taxes work compared to what you're used to as a sole proprietor. Instead of paying self-employment tax on your entire profit, S Corp status lets you split your income between salary and distributions, eliminating that 15.3% tax burden on the distribution portion above your reasonable salary requirement.
Feeling unsure about how much you could actually save? Lettuce makes it simple. With our tax calculator and automated setup, you can see your potential savings in minutes and keep more of what you earn, without drowning in forms or IRS jargon.
An S corporation (S Corp) isn’t a separate legal business type like an LLC or C Corp; it’s a tax election you make with the IRS. In simple terms, it’s a way of telling the IRS how to treat your business income. You keep your LLC’s legal protections and liability shield, but by electing S Corp status, you gain tax advantages that sole proprietors and default LLCs don’t get.
The key benefit is income splitting: instead of paying the 15.3% self-employment tax on all your profit, you divide income into two parts: a reasonable salary (subject to payroll taxes) and distributions (which skip self-employment tax).
Once your business consistently earns at least $80,000 in annual business income, the tax savings usually outweigh the added costs of payroll and compliance. For example, for a $100,000 profit, paying yourself $60,000 in salary and $40,000 in distributions could save you over $6,000 in self-employment taxes without spending anything extra.
The best time to make this transition is when your profit reliably crosses that $80K threshold; that’s when the math works strongly in your favor.
S Corps operate as pass-through entities, meaning business profits flow directly to your personal tax return instead of being taxed at both corporate and individual levels. Unlike traditional corporations, which face double taxation, with profits taxed at the company level and again as dividends, S Corps avoid this entirely. Your income, deductions, and credits return to your personal return, keeping more money where it belongs.
When tax season arrives, your reporting looks different than contractor life. Instead of a 1099 for all income, you’ll get a W-2 for your salary and a K-1 form showing your share of profits, losses, and deductions. Meanwhile, your S Corp still issues 1099s to contractors you hire. This setup reflects your dual role as both employee and shareholder, reinforcing the strategic tax benefits of income splitting without extra complexity.
S Corp filing deadlines don't have to keep you up at night. Understanding these key requirements puts you in control, and the right automation makes tracking them effortless.
Jan 15 — Final prior-year estimated tax payment due (for shareholders).
Jan 31 — Issue 1099-NEC to contractors paid $600+ and file with the IRS.
Jan 31 — File Form 940 (FUTA) for the prior year.
Jan 31 — Form 941 Q4 and any year-end payroll reconciliations are due.
Mar 15 — Form 1120-S due for the prior year. Provide Schedule K-1 to each shareholder by this date.
Mar 15 — If needed, file Form 7004 for an automatic extension to Sept 15.
Apr 15 — Shareholders file personal returns and include their K-1.
Apr 15 — Estimated tax payment Q1 due (shareholders).
Apr 30 — Form 941 Q1 due.
Sept 15 — If you extended, your Form 1120-S and K-1s are due now.
Sept 15 — Estimated tax payment Q3 due (shareholders).
Payroll tax deposits: semiweekly or monthly, depending on your deposit schedule.
State filings: franchise taxes, annual reports, and registered agent fees vary by state.
Contractor onboarding: Collect W-9s before the first payment to simplify January 1099s.
Tip: If a deadline falls on a weekend or federal holiday, the due date moves to the next business day. If you operate on a fiscal year, shift these dates to your year-end.
Lettuce handles deadline tracking, payment scheduling, and form preparation automatically. There is no more calendar anxiety or missed filings. Your S corporation stays compliant while you focus on growing your business.
The IRS doesn't let S Corp owners take shortcuts when paying themselves. You must run payroll and pay yourself a reasonable salary that reflects what someone doing your job would earn in the open market. Think of it as the IRS saying, "Nice try, but you can't just take everything as distributions to avoid payroll taxes." A common guideline suggests that at least 40% of your business's net income should be classified as salary, so if your business nets $200,000, you'd typically pay yourself around $80,000. Make sure some evidence, like comparable salaries for similar duties in your area, backs up your salary.
Once you've established your reasonable salary, here’s where the savings kick in: payroll taxes like Social Security and Medicare apply only to your salary portion, not your profit distributions. While you'll pay the standard 15.3% self-employment tax on your salary, those distributions flow through to your personal return without getting hit by payroll taxes.
This split is exactly why S Corps can save you thousands; you’re only paying payroll taxes on part of your income instead of all of it. Managing S Corp payroll becomes straightforward once you understand this structure.
Most solopreneurs won’t encounter other S Corp–level taxes, but here are the main ones that exist and when they apply:
While S Corps avoid federal corporate income tax through pass-through taxation, state rules can vary widely. Some states follow the federal election automatically, while others impose additional requirements or even tax S Corps differently. Here are the main things to know:
State recognition of S Corps. Most states recognize the federal S Corp election, but a handful require you to file a separate state form. If you don’t, your business may be treated as a C Corp for state purposes and taxed at the corporate rate.
State-level income taxes. Some states tax S Corps directly, while others tax only the shareholders on their share of the income. A few states, like Texas, don’t have a state income tax at all, though they may impose franchise or gross receipts taxes.
Composite returns. Many states require or allow S Corps to file composite returns on behalf of nonresident shareholders. This simplifies compliance for businesses with owners living in multiple states.
Pass-through entity (PTE) taxes. To help business owners work around the $10,000 (increased to $40,000 starting in 2025) federal cap on state and local tax (SALT) deductions, some states allow S Corps to pay state income taxes at the corporate level. The business deducts the full amount, and owners receive a credit or exclusion on their personal returns.
Other state taxes. Depending on your industry and location, your S Corp may also owe state or local sales tax, property tax, or excise tax. These obligations apply regardless of entity type, but it’s worth noting that forming an S Corp doesn’t make you exempt.
For most solopreneurs, the state-level impact is minimal compared to federal payroll obligations, but it’s smart to check your state’s rules so you don’t miss an extra filing or payment.
Smart S Corp tax deductions go beyond just tracking receipts, they’re about focusing on strategies that deliver real savings versus busy work. The biggest wins come from structural advantages, not just spending money to chase write-offs.
Claim standard business deductions such as home office expenses, vehicle costs, equipment purchases, professional development, and health insurance premiums. Every legitimate expense reduces your taxable income dollar for dollar.
Prioritize structural savings over expense-based deductions. For example, saving $8,000 in self-employment tax through S Corp status equals the benefit of a $32,000 deduction, without spending anything extra. That’s the power of changing how you’re taxed, not what you buy.
Maximize your QBI deduction of up to 20% on business income. Many small firms underutilize this benefit due to complex eligibility rules, but most service businesses qualify under certain income thresholds, making this one of the most powerful tax opportunities for solopreneurs.
Supercharge retirement contributions. You can contribute up to 25% of your compensation, capped at $70,000 for 2025, into SEP IRAs or Solo 401(k)s. These contributions reduce your taxable income today while building wealth for tomorrow.
Separate personal and business expenses carefully. S Corps face stricter IRS scrutiny than sole proprietorships, so clean records protect your deductions and make audits far less stressful.
Time major purchases strategically. For instance, buying a $5,000 laptop in December instead of January lets you maximize deductions in the current tax year, which can be especially valuable in a high-income year.
Learning how to set up an S Corp used to mean juggling multiple vendors, endless paperwork, and crossing your fingers you didn’t miss a step. The traditional route involves forming your LLC, applying for an EIN with the IRS, filing Form 2553 for your S Corp election, and opening a dedicated business bank account.
Miss any part of this process, and you could face penalties or even lose S Corp status entirely. Filing Form 2553 is especially critical because without it, your business stays taxed as a default LLC or sole proprietorship, leaving you stuck with higher self-employment taxes.
Most solopreneurs already qualify for S Corp status, but the IRS does set a few limits:
Your business must be domestic.
You can’t have more than 100 shareholders (not an issue for solopreneurs).
Shareholders must be individuals, certain trusts, or estates; no corporations, partnerships, or nonresident aliens.
You can only have one class of stock.
If you’re running a business of one, you’re almost certainly eligible. These rules matter more if you expand to include other owners down the line.
To officially elect S Corp status, you must file Form 2553 with the IRS. The timing is strict: it must be filed within two months and 15 days of the start of the tax year you want the election to take effect. Some states also require a separate state-level election form if they don’t automatically follow the federal election.
Your business bank account isn’t just a convenience; it’s your legal lifeline. Mixing personal and business finances can pierce your LLC’s liability protection and create a compliance nightmare with the IRS. A dedicated business account protects your personal assets, keeps your bookkeeping clean, and ensures your deductions stay legitimate.
LLC or sole proprietor: Simple setup, but every dollar of profit is subject to self-employment tax.
C Corp: Access to unlimited shareholders but double taxation at both the corporate and individual level.
S Corp: Middle ground, flexibility of an LLC with the tax savings of pass-through treatment.
For solopreneurs, S Corps often hit the sweet spot: liability protection, tax efficiency, and compliance that can now be managed automatically.
Forming an S Corp doesn’t have to feel like a maze of paperwork and professionals. Traditionally, you’d spend weeks coordinating with a lawyer, accountant, bank, and payroll provider, hoping you didn’t overlook a critical step. Lettuce changes that experience completely.
In one streamlined process, we handle your LLC, EIN, and Form 2553, set up your banking and payroll, and keep you compliant with IRS rules. You stay focused on your business while we handle the tax savings. Get started today and see how easy S Corp formation can be with Lettuce.
You're doing amazing work building your business, and now you want to keep more of what you earn. These questions cut straight to what matters most to help you make confident decisions about your tax strategy.
Your savings depend on your profit level, but the numbers are compelling. Freelancers earning $80,000 or more could potentially save $5,000 or more in taxes by forming an S Corp. The magic happens because you only pay self-employment taxes on your salary portion, not your entire profit. Use the Lettuce tax calculator to see your personalized savings estimate.
The $80,000 threshold is where S Corp savings typically outweigh the extra administrative costs and complexity. Below this amount, the payroll setup, additional tax filings, and compliance requirements often cost more than you'll save. If you're approaching or exceeding $80,000 in annual net profit, start exploring the S Corp election for next year.
As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on your entire income. With S Corp status, you only pay that 15.3% on your salary, and distributions are exempt from self-employment tax. On $100,000 in profit, this could save you over $7,000 annually compared to sole proprietorship taxation.
Your S Corp tax return (Form 1120-S) is due March 15, with a potential six-month extension to September 15. Missing the deadline and facing $ 220 per shareholder per month in penalties, that's $ 2,640 annually for a solo owner. Set up automated deadline tracking and quarterly payment systems now to avoid these costly mistakes.
The IRS requires you to pay yourself a "reasonable salary" for the work you perform, not taking $1 salary to avoid payroll taxes. A good rule of thumb is 40-60% of your net profit (after business expenses) as salary, depending on your industry and role. The remaining profit can be taken as distributions, which aren't subject to self-employment tax.
S Corps can claim the same business deductions as other entities: home office, vehicle expenses, equipment, professional development, and health insurance premiums. You may also qualify for the 20% Qualified Business Income (QBI) deduction on your pass-through income. Focus on maximizing structural savings from S Corp status first; saving $8,000 in self-employment tax beats chasing $2,000 in additional deductions.
The $80K profit rule is your signal: once your business hits that mark, S Corp status can unlock thousands in tax savings every year. Instead of spending hours juggling vendors and paperwork, you can let Lettuce handle the setup, payroll, and compliance, so you keep more of what you earn without the chaos.
Ready to simplify your business finances and unlock your savings? Get started today with Lettuce and see how easy an S Corp election can be.