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The tax benefit of operating as a S-Corp come into play when business profits exceed a reasonable salary for the owner.

Business owners are required to pay ~15% in Social Security (SS) and Medicare taxes. These taxes are collected differently for the sole proprietor compared to a S-Corp owner.

As a sole proprietor SS and Medicare taxes are paid on all business profits in the form of the self-employment tax.

As a S-Corp owner SS and Medicare taxes are only paid on the owner's wages. Distributions in excess of wages are not subject to these taxes.

All distributions from to a S-Corp owner must be in the form of wages until a reasonable salary has been paid.

Distributions in excess of the owners reasonable salary are not subject to SS and Medicare taxes, providing the saving over operating as a sole proprietor. A general example...


Sole Proprietor

S-Corp Owner

Business Profits






Profit over Wages



SS & Medicare Taxes



There are additional expenses to operating as an S-Corp including payroll costs and preparation of a business tax return.

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