Answer by Wray Rives:
he primary benefit to S Corp vs sole proprietor is that you may be able to save significant self-employment taxes. Sole proprietors pay 15.3% SE tax in addition to income tax on the net profit from their business. S Corps pay their shareholder/owners a salary which is effectively subject to the same 15.3% employment tax when you figure in the employee’s 7.65% FICA/Medicare tax and the employer’s 7.65% FICA/Medicare tax. Any remaining earnings in the S Corp pass through to the owner(s) and is taxable income to the owners much like a sole proprietorship, but is not subject to employment taxes.
Overhead of an S Corporation
The primary downside to an S election is additional “overhead” because you have to create a legal entity such as LLC or Corporation, file a separate tax return and you have to pay yourself a reasonable salary, which means you have to run payroll.
I would highly recommend anyone considering an S election seek advice from a knowledgeable tax professional, because it is an area of tax reporting you can get yourself in trouble with easily. I am a big fan of S Corporations for business owners that have the right set of facts to make it work, but I personally have also seen a lot of entrepreneurs (including knowledgeable people such as attorneys and financial columnists) get themselves in trouble with their DIY S Corp election.