You just closed your biggest deal of the year and you’re celebrating a $100,000 profit. But there’s a “silent partner” waiting at the table to take a $15,300 cut before you even pay income tax. That partner is the Self-Employment Tax Savings, and if you are operating as a standard LLC, you invited him in. In this episode of the 5-Minute PRIME Podcast, host Martin Maxwell breaks down why the “One Big Beautiful Bill Act” didn’t just fix bonus depreciation—it saved the critical 20% Pass-Through Deduction (QBI). But to capture it without getting crushed by self-employment taxes, you need the right vehicle. We’re firing your silent partner and showing you how to plug the leak in your bucket.
Tune in to learn:
- The Self-Employment Penalty: Why active investors in standard LLCs are taxed harder than W-2 employees, paying both halves of Social Security and Medicare.
- The “Two-Bucket” Strategy: How the S-Corp election allows you to split income into Salary and Distributions to legally wipe out thousands in taxes.
- The “Reasonable Salary” Trap: Why paying yourself $0 is an audit trigger and how to use data to set a salary that keeps the IRS happy while you keep your cash.
- The $50,000 Tipping Point: The exact math on when the administrative costs of an S-Corp are outweighed by the massive tax savings.
Are you ready to stop voluntarily donating thousands to the IRS? Subscribe now to learn the mandatory “Manage” phase move for 2026.
Listen to 5-Minute PRIME podcast Now!
Play on your Favorite Podcast Platform
Show Notes: Tax Savings
Key Takeaways
- The “Silent Partner” Cost: Operating as a standard LLC (a disregarded entity) means you pay the full 15.3% Self-Employment Tax Savings on every dollar of net profit, as you are covering both the employer and employee portions.
- The S-Corp Solution: By filing Form 2553, you can split your income into two buckets: Salary (subject to SE tax savings) and Distributions (exempt from SE tax savings). This structure optimizes the 20% QBI deduction and reduces your overall tax savings burden.
- The “Reasonable Salary” Requirement: To avoid audits, you must pay yourself a market-rate salary for the work you perform. Paying a $1 salary while taking massive distributions is a “hog” move that leads to penalties.
- The Tipping Point: Because S-Corps require payroll software and separate tax returns (admin costs of ~$2,000/year), this strategy generally makes financial sense only when your annual net profit exceeds $40,000–$60,000.
- Active vs. Passive Warning: This strategy is strictly for active income (flipping, wholesaling, commissions). Never hold passive rental properties inside an S-Corp.
Action Step:
- Pull your last tax return or P&L statement and locate Schedule C, Line 31: “Net Profit.”
- Determine if your net profit is $50,000 or higher, which is generally the tipping point for S-Corp benefits.
- Calculate potential self-employment tax savings. Example: $100,000 profit × 15.3% = $15,300; S-Corp election could save roughly $7,500–$10,000.
- Email your CPA with the subject line “S-Corp Election Analysis for 2026” to review your options.
- Prepare for payroll automation using software like Gusto or ADP, which typically costs $500–$600 per year.
Mentioned in This Episode
Episodes to Revisit:
- Episode 101 – 1031s to Defer Taxes & Build Wealth
- Episode 102 – 1031 Minefield: 4 Fatal Flaws That Cost Investors Millions
- Episode 103 – the “Big Beautiful Bill” Supercharged Cost Segregation
- Episode 104 – Cost Segregation Playbook
Tools:
- IRS Form 2553 – S-Corp Election
- Payroll software: Gusto, ADP
- RCReports – Reasonable Compensation Data
Challenge for Today:
- Identify all active income streams from flipping, wholesaling, commissions, or property management fees.
- Calculate your “lost capital” by multiplying your net profit by 15.3% to see how much is being paid in self-employment tax. Example: $75,000 × 15.3% = $11,475.
- Verify if your net profit consistently exceeds $50,000, making the S-Corp election worthwhile.
- Schedule a conversation with your CPA to evaluate filing an S-Corp election for 2026 and start keeping more capital in your business.
