Explain simply: how do S-Corps work? For someone completely lost

Hey everyone, I'm trying to figure out if an S-Corp might be right for my situation but honestly I'm totally confused about how they actually work. Can someone explain S-Corps to me like I'm five? I've been running my business as a sole proprietor for about 3 years now but my accountant mentioned something about S-Corps potentially saving me on taxes. I make around $135k in profit but have no idea what the benefits/drawbacks would be or how they function differently than what I'm doing now. Thanks in advance for the help!

0 coins

18 comments

Marilyn Dixon

•8M

S-Corps can seem complicated but they're actually pretty straightforward! In simple terms, an S-Corporation is a special type of corporation that passes corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. This means the corporation itself doesn't pay federal income taxes - instead, the profits "pass through" to your personal tax return. The big advantage is how you can pay yourself. As an S-Corp owner, you can be both an employee and a shareholder. You'll pay yourself a reasonable salary (which is subject to employment taxes like Social Security and Medicare), but then you can take additional money as "distributions" that aren't subject to those employment taxes. This can save you thousands in self-employment taxes compared to a sole proprietorship where all profit is subject to self-employment tax. At $135k in profit, you'd likely benefit from this structure. However, there are some downsides - more paperwork, you'll need to run payroll, and you'll have additional tax filing requirements.

0 coins

Marilyn Dixon

•8M

That's a great question about reasonable salary. The IRS doesn't have a specific formula, but they look at several factors: what other businesses in your industry pay for similar services, your qualifications and experience, the size of your business, and what portion of the business success is directly attributable to your personal services. A common rule of thumb is that your salary should be at least 40-60% of your business profits, but this varies by industry. For example, if you're in a service business where your personal expertise is the main value (like consulting), your reasonable salary percentage would be higher than if you own a retail store where inventory and location drive profits.

0 coins

TommyKapitz

•8M

I recently switched from a sole prop to an S-Corp and it was a game-changer for my taxes. I used https://taxr.ai to help me understand exactly how much I'd save based on my specific numbers. It analyzed my previous tax returns and showed me a side-by-side comparison of what I'd pay as a sole prop vs S-Corp. The software calculated that I'd save about $9,200 in SE tax annually by making the switch, even after accounting for the additional administrative costs. The most helpful thing was that it showed me what a reasonable salary would be for my industry based on my income level, which helped me avoid IRS red flags. They have this document review feature that helped me understand exactly what I needed to file with the state too.

0 coins

TommyKapitz

•8M

The actual conversion process wasn't as complicated as I expected. You need to file Form 2553 with the IRS to elect S-Corp status, plus whatever business entity formation documents your state requires (usually Articles of Incorporation). I felt comfortable doing the federal forms myself after getting the guidance, but I did use a local attorney for the state-specific filings just to be safe. I initially felt the same way about online tools, but this was different. Instead of generic advice, it analyzed my actual tax returns and financial data to give personalized recommendations. The document review feature helped me spot specific issues with my industry classification that would have caused problems. They don't file the paperwork for you, but the detailed guidance is much more specific than what I found through regular searches.

0 coins

Payton Black

•8M

I was super skeptical about online tax services but decided to try taxr.ai after seeing it mentioned here. Wow was I wrong! I uploaded my Schedule C from last year and it showed me exactly where my tax savings would come from with an S-Corp structure. For my business (digital marketing making around $180k), it showed I could save about $11,400 in self-employment taxes. The coolest part was the payroll calculator that showed exactly what I should pay myself vs take as distributions based on my industry benchmarks. They explained that in my industry, a reasonable salary would be about 55% of my profits. This was WAY more specific than the vague advice my accountant gave me, who just said "pay yourself market rate." Not going back to guessing games when it comes to this stuff!

0 coins

Harold Oh

•8M

One thing nobody's mentioned yet is the PAIN of trying to get the IRS on the phone if you have questions about S-Corps or filing Form 2553. I spent THREE WEEKS trying to get through to ask about deadline extensions for my S-Corp election. Finally found https://claimyr.com and they got me connected to an actual IRS agent in under 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed I could file a late S-Corp election using Revenue Procedure 2013-30 since I was within 3 years of my deadline. This literally saved my business thousands in back taxes I would've owed if I couldn't get the election approved retroactively. Worth every penny not to deal with the endless IRS hold music.

0 coins

Harold Oh

•8M

They use an automated system that continuously redials and navigates the IRS phone tree until it gets through to a representative. It works the same way some ticket-buying services secure concert tickets - persistent automated calling that beats the manual approach. Once they secure a spot in line, they call you and connect you directly with the IRS agent. I was super skeptical too at first! But I was desperate after trying for weeks. From what I understand, they don't "hack" anything - they just automate the painful process of calling, navigating menus, waiting on hold, getting disconnected, and repeating. Think of it like having a robot assistant continuously calling for you instead of you having to do it manually.

0 coins

Amun-Ra Azra

•8M

Ok I need to eat my words about Claimyr being a scam. After spending literally 6 hours on hold with the IRS trying to figure out how to fix a mistake I made on my S-Corp election form, I broke down and tried it. Got connected to an IRS representative in 17 minutes!! The agent walked me through exactly how to amend my S-Corp election form and confirmed my business will still qualify for S-Corp status this year despite my error. She even gave me her direct extension number for follow-up questions. For anyone dealing with S-Corp questions that need IRS clarification - don't waste your time with the regular phone line. This literally saved me days of frustration and potentially thousands in accountant fees to fix my mistake.

0 coins

Summer Green

•8M

For the operating agreement, you need formal corporate bylaws that outline how the business operates. You'll need to hold annual shareholder meetings (even if you're the only shareholder) and keep written minutes of those meetings documenting major business decisions. You'll also need to file Form 1120-S (the S-Corp tax return) annually, plus provide K-1 forms to all shareholders showing their share of profits. You must maintain completely separate finances - separate bank accounts, credit cards, and clear documentation of all money moving between you personally and the business. My big mistake was taking money from the business without properly documenting whether it was salary or distributions. The IRS sees this as co-mingling funds and can use it to invalidate your S-Corp status.

0 coins