W-2 vs S-corp: the real math (not the hype)

If you make money on your own, you've heard it: "form an S-corp and save a fortune on taxes."

It's true often enough to be dangerous — because it's also wrong often enough to cost you real money. The difference isn't an opinion. It's one number you can compute today.

The big idea

A sole proprietor pays self-employment tax (15.3%) on basically all their profit. An S-corp lets you split that profit into a reasonable salary (which still gets payroll tax) and distributions (which don't). The savings come from the distribution slice.

So the whole game is: how much profit can you reasonably move out of "salary" and into "distribution" — minus the cost of running the S-corp (payroll, extra filing, sometimes state fees).

When it usually wins

• Your net profit is comfortably above a reasonable salary for your role (so there's a meaningful distribution slice).
• That spread is big enough to clear the ~$1.5k–3k/yr of added admin cost.

When it usually loses

• Profit is close to what you'd have to pay yourself as salary anyway (little to no distribution = little to no savings).
• You're early, irregular, or the state fees eat the benefit.

The honest part

The "reasonable salary" requirement is the catch everyone skips. Pay yourself too little to juice the savings and you're inviting a problem. The math only works on the legitimate distribution slice.

Run your own number

Don't guess — the assistant will run both scenarios on your actual income and show the dollar difference, including the SE-tax swing.

General tax-planning information, not tax advice. Confirm with a CPA/Accountant/Tax Attorney/Trusted Advisor before acting.