What’s one of the biggest benefit of having a S-corporation for federal tax purposes versus Limited Liability Company (LLC), Sole Proprietorship and/or General partnership?

One of the biggest advantages of setting up an S Corporation and if you talk to many small business owners why they set up S-corps, they’ll tell due to savings you can receive from Self-employment taxes.

When you set up an S-corporation, the S-Corporation is considered a “Person” of its own and will not be subject to Self-employment taxes rather the income earned by the S Corporation will be passed down to its shareholders. Furthermore, since the S-corporation is considered as a different entity from the owner, you have to give yourself “Reasonable” Compensation when you do work for the S-Corporation. Think of it as, if you were to work for XYZ Corporation and you did work for them, it is rightly expected that XYZ Corporation would pay you for the work you do for them.
So let’s look at this two scenarios:
1) One with income coming from Sole Proprietorship assuming 100,000 Net Income.
2) One with income coming from S Corporation assuming 100,000 Income from the business & 50,000 Wage income you would give yourself from corporation per year.
For the sake of simplicity, let’s assume Ordinary Tax Rate is 20%.

Scenario 1: If you continued as a Sole Prop assuming all things equal:
Ordinary Taxes at 20%: 20,000
Self-employment taxes at 15.3 percent: $15,300
Total Taxes: 35,300
Scenario 2: If we set up a S Corp the estimated Taxes would be assuming all things equal:
Ordinary Taxes at 20%: (100,000 – 50,000 – 3,825)*20% = $9,235
Employer & Employee Taxes: 7,650
Shareholder’s Tax on Wages: 50,000*20% = 10,000
Total Taxes: 26,885
So the savings would be 8,415 if we set up an S-Corporation! That’s a quite a bit of change that you can use towards investing into your business!