How an S Corp Saves You Money – Tax Benefits Explained

For many small business owners in Texas, electing S Corporation status is one of the most effective ways to cut tax liability. Gray & Associates CPA has guided hundreds of entrepreneurs through this process, showing them exactly how S Corp tax savings can improve their bottom line while keeping them compliant with IRS requirements.

The Self-Employment Tax Problem

Most sole proprietors and LLC owners are familiar with the 15.3% self-employment tax, which covers Social Security and Medicare. While necessary, this tax applies to all net business income when you operate as a sole proprietor or default LLC. For a freelancer or contractor making $80,000 in profit, that’s over $12,000 in self-employment tax—before considering income tax. It’s a heavy burden that often surprises business owners once profits start to grow.

S Corp Solution – Pay Yourself a Salary + Distribution

The S Corporation structure changes how profits are taxed. By paying yourself a reasonable salary (subject to payroll tax) and then taking remaining profit as shareholder distributions (generally not subject to self-employment tax), you reduce overall payroll taxes.


For example:


  • Sole proprietor with $100,000 profit: roughly $15,300 in self-employment tax.
  • S Corporation owner paying $60,000 salary and taking $40,000 in distributions: payroll tax applies only to the $60,000 salary, saving about $6,000 in taxes.


At higher profit levels, the savings scale. On $150,000 profit, an S Corp owner may save $9,000–$10,000 annually compared to a sole proprietor, depending on how salary is set. These savings are what make the S Corp tax strategy so powerful for Texas small business owners.

Additional Tax Benefits of S Corps

Beyond reducing self-employment tax, there are other advantages:


  • Deductible health insurance premiums for owner-employees can be claimed on your personal return.
  • Family payroll strategies allow spouses or children working in the business to receive wages that shift income and build retirement savings.
  • Avoidance of double taxation on the sale of business assets, unlike with a C Corporation, where profits are taxed at both the corporate and personal levels.


While not every client uses these advanced tactics, they demonstrate the flexibility of the S Corporation election.

Considerations & Caveats

It’s important to set realistic expectations. Salary must still be taxed, and compliance steps like payroll and corporate filings add modest costs. The 20% Qualified Business Income (QBI) deduction applies differently—salary doesn’t qualify, but distributions often do—so planning is needed to optimize both benefits. Additional accounting fees and payroll processing expenses are usually more than offset by tax savings, but this varies by situation. Gray & Associates CPA provides a clear projection so you can make an informed decision before moving forward.

Real-Life Results

Many of our clients have seen meaningful results in the first year of adopting the S Corp strategy. For example, one consultant saving $6,500 annually has continued to benefit from the same structure for more than 20 years. Others have found the election transformative as their businesses scaled from modest profits into six figures. These results demonstrate the long-term, compounding impact of making the right tax election early on.