S-Corp Guide

An S-Corporation (S-Corp) is a special type of business entity that lets you enjoy the legal protections of a corporation while avoiding double taxation. The "S" refers to Subchapter S of the Internal Revenue Code, which governs how these businesses are taxed.

Unlike a C-Corp — where the company pays corporate taxes and then shareholders pay taxes again on dividends — an S-Corp passes its income, losses, deductions, and credits directly through to shareholders. You report your share of the business profit on your personal tax return and pay tax at your individual rate.

• Pass-through taxation: Business profits are taxed once at the shareholder level, not twice.
• Legal protection: Like any corporation, your personal assets are shielded from business liabilities.
• Up to 100 shareholders: S-Corps can have up to 100 shareholders, all of whom must be US citizens or permanent residents.
• One class of stock: All shares must carry the same rights — no preferred stock structures.

The biggest reason creators and freelancers elect S-Corp status is self-employment tax savings. When you're self-employed or running a single-member LLC, you pay 15.3% self-employment tax on all net profits. With an S-Corp, you split your income into two buckets:

• Reasonable salary: You pay yourself a salary — this portion is subject to payroll taxes (Social Security and Medicare).
• Distributions: Any profit above your salary is taken as a distribution, which is not subject to self-employment tax.

For example, if your business earns $120,000 and you pay yourself a $70,000 salary, you only owe payroll taxes on $70,000 — saving potentially $7,000+ per year compared to a standard LLC or sole proprietorship. If you're still weighing your options, review our detailed S-Corp vs LLC breakdown to evaluate tax savings versus operational requirements.

The savings become meaningful once your net income consistently exceeds $40,000–$50,000 per year. Below that threshold, the cost of running payroll and maintaining S-Corp compliance may outweigh the tax benefit.

Before electing S-Corp status, your business must meet specific IRS requirements:

• Must be a domestic corporation or eligible LLC
• Cannot have more than 100 shareholders
• All shareholders must be US citizens or legal permanent residents
• Can only issue one class of stock
• Cannot be certain financial institutions, insurance companies, or domestic international sales corporations

You also need to file IRS Form 2553 to make the election. This form must generally be filed by March 15 of the tax year you want the election to take effect, or within 75 days of forming your business for same-year treatment.

Setting up and managing an S-Corp involves payroll, bookkeeping, tax filings, and compliance — all of which can feel overwhelming if you're doing it alone. Otto's dedicated S-Corp formation and management platform handles all of this so you can focus on your work.

• S-Corp election guidance: We walk you through filing Form 2553 correctly so your election is accepted by the IRS.
• Payroll setup: Otto sets up your payroll so you can pay yourself a reasonable salary compliantly.
• Bookkeeping: Automated transaction categorization keeps your books clean year-round.
• Tax prep: Your books are always audit-ready so tax season is never a scramble.