What is an S-Corp and Why Should You Know About It?

I love, love, love, this question, because it’s a knowledge building question. Access to knowledge is a source of power and a lack of access is oftentimes what keeps those of us from marginalized backgrounds out of the arena, out of the room and without a seat at the table. So, I love this question because it builds our knowledge, and in building our knowledge around certain business aspects, we’re building our source of power in our business. 

An S-Corp is a tax classification and let me be clear, I am not an accountant, but I am sharing my knowledge in regards to my experience. It is vital that you do your own Googling and research to figure out what is best for you and your business! Now before I get into an S-Corp, I want to briefly discuss LLC’s.

So, when you file or officially register your business with the state as an LLC one of the amazing benefits is that you have the choice of how you want to be taxed. In the majority of LLCs, their tax classification is as a sole proprietor. When you file for your LLC, your LLC separates you from your business, but you're still taxed as an individual. That’s why you can still file your business income on your personal taxes.

An S-Corp on the other hand, is a type of tax classification beyond sole proprietorship. You can elect into an S-Corp once you have reached a certain level of revenue. One major reason why folks will elect into an S-Corp tax classification is that when you’re taxed as a sole proprietor, you have to pay a self-employment tax. 

Self-employment tax is 15.3% and you’ll have to pay this in addition to your income tax. When you’re an S-Corp, you don’t have to pay that tax, but there’s a catch. You have to put yourself on payroll and give yourself a salary. You are exempt from paying the self-employment tax and you’re paying income taxes through running payroll for yourself. This is one of the ways that filing for an S-Corp can actually save you money on paying taxes! That is one of the many reasons why folks will elect into an S-Corp tax classification as their business grows.

Usually, your business has to be making a significant amount of profit for you to reach the threshold where it's beneficial for you to be an S-Corp. I've heard some folks identify that threshold of $60,000-$80,000 of net revenue (revenue-business expenses) being the point where electing into an S-Corp tax classification becomes beneficial. Again, I am not an accountant so you would want to connect with an accountant to determine specifics for your situation. 

The timeline of transitioning to being taxed as an S-Corp is one of the things you’ll want to discuss with your accountant as your business grows and you monitor your revenue and taxes. Everyone’s situation is unique and some things that are beneficial for others won’t be beneficial for you. Still, I wanted to share this information with y’all to be sure that as business owners we are able to take advantage of these money-saving options in our business.

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