One of the advantages of being the owner of a business, specifically one that is taxed as an S-Corp is that you have some flexibility in how, when and how much you pay in taxes. In case the S-Corp term is unfamiliar to you, it is basically forming a corporation or an LLC and filing the correct follow-on forms with the IRS.

The reason that you now have some flexibility in your taxes is that you are now fulfilling 2 distinct roles and each one can get paid differently. You the employee will get paid with an annual salary, while you as the business owner will get paid based upon the profits of the business.

Does that sound interesting to you? I know it sounded very interesting to me when I first found out about it.

Basically what this means is that you have the ability to take some of your compensation as a quarterly distribution to you the owner based upon the profits from the business instead of all of your compensation as a salary to you the employee.

One of the big advantages to doing so is that an ownership distribution is not subject to payroll taxes (social security and medicare) like the salary is. That single strategy alone can have a huge impact on the amount of taxes you pay, and thus what money is left over and makes it into your pocket as spendable net income.

If you pay yourself 75% of the salary that you were planning on paying yourself, and hold that 25% back in the business and then pay it to the owner as a quarterly distribution of profits in the business, that quarterly distribution is not subject to payroll taxes and thus saves 13.3%, and in 2012 that goes back to a 15.3% savings. In case you didn’t know, Congress passed a law that people in the news media are calling a “payroll tax holiday”, which gives people a 2% break on their payroll taxes as part of the economic stimulus programs to help the economy recover and climb out of the 2009-2010 recession.

Check out the chart below to see the savings you would realize in payroll taxes this year alone with the rate at 13.3%:

Proposed Salary Payroll Taxes Actual Salary (75%) Payroll Taxes Savings
$50,000       $6,650  $37,500  $4,988  $1,663
$75,000       $9,975  $56,250  $7,481  $2,494
$100,000   $13,300  $75,000  $9,975  $3,325

And in 2012 after the 1 year payroll tax holiday expires and the rate goes back to 15.3%, the picture looks even better:

Proposed Salary Payroll Taxes Actual Salary (75%) Payroll Taxes Savings
$50,000      $7,650   $37,500      $5,738   $1,913
$75,000    $11,475   $56,250     $8,606   $2,869
$100,000  $15,300   $75,000    $11,475   $3,825

There have been some news stories recently that claim the law changed and you can’t do this anymore, but those are flat out wrong. I specifically asked my tax attorney about that a few weeks ago. He told me that no laws had changed and nothing is different. Just another case of the media getting their facts mixed up, and then blowing the story out of proportion. I am not a CPA or Attorney myself, read my legal disclaimer, so you should talk to yours to be sure about the advice for your specific situation.

Finally the best part about the the above example is that it is just one of many tax savings strategies that are available to you as a business owner.

Author's Bio: 

Paul Monax

Independent Contracting Resources

I am a Mentor for Independent Contractors to help them with the Business Side of their Business.

I have been a small business owner of a number of businesses over the past 11 years.

For the past 6+ years have been as the owner of a small Independent Contracting business specializing in custom software development for large enterprise systems.

Because Being Independent Doesn't Mean You Have To Do It All Alone!