Should I own an S-Corp to save taxes?

How many S-Corps should you have?  Is one enough?  Multiple? Or should you skip the s-corp altogether? I will only focus on the taxes and retirement savings when it comes to the s-corp and not any legal or shareholder benefits.

S-Corporations are great for small business taxes, but you need to know how those taxes work to make the most of your s-corp.  I will talk about two separate taxable incomes; W-2 income and distributions.

There are two sides to FICA taxes; social security and Medicare taxes.  The W-2 income will have social security and medicare taxes for both the employee and employer.  It breaks down to 6.2% for social security and 1.45% for medicare.  Both employer and employee each pay this amount bringing the total to 15.3%.  Social security is only taxed on the first $147,000 for 2022.

Distributions are not subject to FICA taxes.

So, for example, let's say your company was set up not as an s-corp but as an LLC, and you had a net profit of $100,000.  You would pay FICA and federal income taxes on the entire amount.  However, let's say you had the same business and paid yourself a $50,000 salary and took $50,000 in distributions.  You would not pay any FICA on the $50,000 distribution.  Huge savings.

Additionally, let's now say that you also want to save $50,000 on your retirement plan.  You could open a Solo 401k and get most of it pre-tax.  You could potentially save $19,500 pre-tax and make a $12,500 profit-sharing contribution reducing your W-2 federally taxable income to $30,500 and your distribution to $38,500.

Your total compensation was the same, but now you have a much lower tax bill.

While you could still save a similar amount using an LLC, the S-corp distribution effectively saves you 15.3% in FICA taxes on the $38,500.

I like using the s-corp, but there is a catch.  It's the employer's side of taxes.  Suppose you have multiple S-corporations and earn a total income above $147,000. You don't necessarily get capped.  If you have two companies, each paying you $100,000 for a total of $200,000, you'll pay social security and medicare taxes on all of it on the employer side.  If you are taxed as an LLC, the amounts will aggregate and cap out at $147,000 for employment taxes.