Mark Kohler shows how S-corp owners cut self-employment taxes by splitting profits between W-2 payroll and distributions. A $100,000 profit split 60/40 saves $9,000 in payroll tax. The trick is sizing payroll to match your profit without triggering IRS scrutiny.
If I'm going to have 100,000 in profit, I might make $40,000 payroll. So my profit becomes 60 grand. So I've got a 4060 split and I just saved 15% on 60,000. I saved $9,000 by doing a 6040 split. If I didn't even do an S corp, my self employment tax would be over 15 grand. Now my payroll tax is only 6 grand. This is the savings. So by choosing the right amount of payroll, I create savings. Now if we go back to the metrics, right, if I have 50 grand in profit, May payroll should be 50% because you're making less. You want to stay out of harm's way with the irs, you're going to take a little more payroll as a percentage. So we go back to our S corp and let's say I bring in 100 grand, I have 50 grand in expenses and then I net 50, I might take payroll of 25. So there's my W2 and my K1 or profit is 25. Now in this example I saved 3200 in self employment tax. Now you may say, well that's not a lot, but it's a start because the more money you make, the more you save.
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