After the first year, I had $12,000 in W2 income and my corporation earned another $25,000, for a total of $37,000. The approximately $2000+ per month in profits, I paid myself as an "owner dividend" each month. Social Security & Medicare taxes (as employer and employee) were due on the $12,000 W2 income. But, I saved the self employment taxes on the $25,000 as this was considered non earned dividend income. In other words, I saved almost $4000 ($25,000 X 15.3%) in taxes! The following year savings were even greater as my earnings were higher. The key here, is that all profits earned by your corporation are taxed as non earned income at your normal federal and state personal tax rates, but NOT by Social Security or Medicare!

What are the negatives? Besides the cost to set up your Sub S Corporation, there are the additional yearly filing expenses for a corporate tax return and annual report to your state. My accountant charges $500 per year for these services. When you do retire, assuming you are eligible, your retirement income (from Social Security) will be less, because you paid less into the system. However, this should be more than offset by the retirement windfall you will receive from all the tax savings you invested! Additionally, you could pay yourself more as you get close to retirement so as to increase your SS retirement benefits.

Run the numbers for your business and ask your accountant if this will work for you. Be aware however, your accountant may say this is not a good idea. He or she may not be aware of all the benefits. This happened to many friends of mine who had similar businesses but were told that there was little difference to their tax situation if they filed as a Sub S Corp. If you?re not getting an answer that sounds right, get a second opinion. Go to SmallBiZeMarket.com and quiry accountants for your area. We may have a name or two of a good accountant in your area who is well acquainted with the benefits of a Sub S election for your corporation.

So what are you going to do with all that extra money

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