Payroll Tax vs Self-Employment Tax

Why Paying yourself under an S-Corp does SAVE you money!

We are asked so many times - why do I have to pay payroll taxes - why can't I just transfer money to my personal account. Well, for starters, to be compliant with filing as an S-Corp, you must pay yourself a "reasonable salary". (We will address "reasonable salaries" in another post). While having an S-Corp you can do both, take a W2 Salary and Owners Distributions.

The Facts

Self-Employment Tax is the FICA Tax that would normally be seen as part of your W2 -

hence why it is 15.3%. Because it's not paid throughout the year, such as with a W2, it gets

added to your tax return.

Payroll Tax is FICA Tax, that 15.3%. But it's split between the Employer and the Employee,

each paying 7.65%. The employees are pulled from their wages, while the Employer pays

them outright to the government.

For a single worker business, the 15.3% gets paid either way, S-Corp or Sch C. Payroll does

require FUTA, but for most states if you stay in compliance its only an extra 0.6%

For Schedule C, 50% of the Tax is a deductible adjustment to income - which is the exact

same result as an S-Corp deducting it’s Employer Portion as a Business Expense. However,

you pay run the risk of an Underpayment Penalty if you don't keep up with Estimated

Payments through the year since the Tax is added onto your 'Final Bill'. A benefit of the S-Corp Payroll is getting paid regularly through the year means paying your taxes throughout the year, so you don't have a Surprise $20K bill come the spring. Penalties and Interest are also going to accrue much more heavily the larger the bill.

Additionally, Payroll itself is a Business Expense.

Let's walk through an example:

Joan makes $100 in Self Employed Net Income.

On a Schedule C, that means she owes an additional $15.30 on top of what her Federal

Adjusted Gross Income Tax comes to. Her total AGI for regular taxes will include $92.35, as

half of the Self-Employment Tax is taken as an Adjustment to Income.

As an S-Corp, let’s say she runs payroll for herself for $50. Between the Employer and

Employee portions, she’s only paying $7.65 in FICA Tax. Additionally, that $100 of Net

Income is reduced by $50 Payroll and $3.83 in Employer Payroll Taxes. Her new Net Income

that passes through to her Form 1040 is $46.17, and $50 on a W2.

Let’s assume a flat 10% tax rate.

On a Schedule C Joan is taxed for her $92.35 of Net Income normally plus an additional

$15.30. That’s a total tax of $9.24+$15.30 = $24.54.

On Payroll with an S-Corp, Joan is taxed for $96.17 Net Income plus an additional $7.65 in

FICA Taxes. On her actual tax return, Joan owes taxes of $9.61. Including the taxes paid in

payroll, that is a total of $17.26, saving her almost $7 in taxes.