S Corporation.

In plain English

An S corporation is not a separate kind of company you start, but a tax status a corporation or LLC elects with the IRS by filing Form 2553. Its defining feature is pass-through taxation: the business itself generally pays no federal income tax, and profits and losses flow to the owners' personal returns. The common reason small-business owners choose it is self-employment tax savings: an owner who works in the business pays themselves a reasonable salary (subject to payroll tax) and can take remaining profit as a distribution that is not subject to self-employment tax. The IRS requires the salary to be reasonable, not artificially low.

01Why it matters

For a profitable one-person business, electing S corp status can save thousands a year in self-employment tax, but it adds payroll filings, accountant costs, and IRS scrutiny over your salary.

02The math, step by step

A consultant nets $120,000. As a sole proprietor she pays self-employment tax on most of it. As an S corp, she pays herself a $70,000 reasonable salary (payroll tax applies) and takes $50,000 as a distribution with no self-employment tax, saving roughly 15.3% on that $50,000, or about $7,650, minus added payroll and accounting costs.

03What this is NOT

04Receipts

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