In an earlier post about different types of business entities, we mentioned that the biggest advantage for a business to elect S-Corp status with the IRS is to reduce self-employment taxes. 

While that’s true, it’s important to distinguish between a straight-up S-Corp, and an LLC taxed as an S-Corp. Both give you the same tax-saving opportunities, but they are very different in the legal setup, with different limitations and requirements. 

It’s important to make sure you understand these details before choosing how to register your business entity.


Tax benefits aren’t the only advantage to being an S-Corp. There are other benefits you receive as an employee of the S-Corp. 

One little-known benefit is that you can set up health insurance under the S-Corp and deduct your insurance premiums as “self-employed health insurance.” 

Nice, right? But you can only do this if your ”self-employed health insurance” is included in your W2 wages. In other words, it’s important to get a tax professional’s advice in setting it up right.

Other opportunities for owner/employees of an S-Corp have to do with retirement contributions and planning. These opportunities don’t just potentially save big in taxes—they set the foundation for your retirement security. 

But again, there are limitations here, especially if you have other employees in the S-Corp. It definitely requires a personalized conversation with a Tax Pro.

Why Register as an S-Corp?

There’s the why, and there’s the when.

The “why” is specifically around tax savings as stated above. This is especially important with an LLC that moves to elect to be treated as an S-Corp. 

Whether you are an LLC or a sole proprietor, the net income of your business is treated as “self-employment” income and is taxed at 15.3% on top of your regular Federal and State regular income tax.

As an eCommerce or Online Business grows, this “self-employment” tax can be significant. 

There is no hard and fast rule, but we recommend looking at this “S-Corp” status as soon as you hit $30,000 net income annually. That said, it is an individualized situation and decision, because the state income tax piece can vary dramatically, as well as your individual income tax situation (outside of the business implications). 

Some states are more business-friendly than others, so you really need to know what affects you in making the transition to an S-Corp.

Determining Your Salary

Since an S-Corp is defined by paying yourself a salary as an “employee” of your business, making the switch to an S-Corp status requires you to implement payroll immediately. 

Not only do you have to decide how much to pay yourself (the IRS simply states that the amount of salary you pay yourself needs to be “reasonable”).

There is no hard and fast rule on how to set your salary, and there are many components to consider. That said, at The Bottom Line CPA we offer some general guidelines. 

An easy rule of thumb is that if you’re a 100% owner of the business, the salary amount should be between 1/3 and 1/2 of the annual net income (before the salary deduction) of the business.

In addition, the owner/employee needs to be careful as to home much other “distributions” they take out of the company because, in an audit, the IRS will look at that and may reclassify some of those “distributions” into “salary” if the amount relative to salary is way out of proportion.

Another thing to consider (one that the IRS will determine) is how much would you need to pay someone to come into the company and do your job (the things you do). This is not a simple decision and one you need to revisit each year.

Even with these guidelines, determining your salary definitely requires a personalized conversation. Moreover, your decision needs to be reevaluated at least annually (and sometimes sooner in a fast-growing business).

Finding a Payroll System That Works For You

Along with deciding how much to pay yourself, you also have to have a payroll system put in place.  But when it comes to implementing payroll, we recommend the same solution for pretty much everyone. 

Our payroll provider of choice is GUSTO—we think it’s perfect for eCommerce and Online Business owners. 

Not only are they are online and available anytime and anywhere, but they also make sure your taxes are paid timely and your payroll tax returns are filed properly. 

They even have an HR component through their Concierge plan that can help with so many different things in your business… even things you didn't think to ask about!

We have seen many instances where business owners want to save a few dollars by trying to manage payroll themselves. In the end, though, this effort usually just leads to spending more—specifically, more on penalties and interest paid to the government because taxes were not remitted properly, or the payroll tax returns were not filed timely. 

Trust us, there’s invaluable peace of mind to be had in using a payroll service provider like GUSTO to take care of this for you.  It is a cost of doing business that definitely pays off with all the tax savings you gain by being an S-Corp.

How an S-Corp Helps You with Pay, Play and Profit

At TBL, we abide by the principles of Pay, Play and Profit. These apply to any eCommerce or Online Business owner, no matter how they are set up. 

But as a S-Corp business owner, these principles (and process behind them) will help ensure that you are setting aside money to pay yourself, as well as money to pay your taxes on time and in full, which minimizes/eliminates any possibility of penalties and interest (as well as stress) on taxes due.

Let’s be honest: without a predetermined process in place, most of us will not pay ourselves what we need to! As a result, we will not pay our taxes on time, and end up costing our business more money than if we’d just paid ourselves in the first place!

As Certified Profit First Professionals, we believe Profit First is the best method of cash management and profit planning to accomplish Pay, Play and Profit.  We have seen so much success with it!  

Telling your money what to do, instead of your money telling you what to do, is by far the best guarantee of helping your eCommerce or Online Business thrive. Plus, it’s just more fun! Check it out—it just may change your life and the way you feel about your business and how it serves you.

The Bottom Line

Registering as an S-Corp can mean big tax savings for your eCommerce or Online Business, but there are issues you need to consider and decide before registering your business entity as an S-Corp. Talk with a Tax Pro and make sure you’ve got the right financial systems and processes in place to keep your decision on a rock-solid foundation.