Founder LJ Host. Expert in Web Development project execution from concept to launch. Including: domain selection, remote team recruiting and management, project specifications, technology selections, etc.
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I am not an accountant, but I do have a good understanding of this concept.
It works like this. If you are self employed there is a slef employment tax on all your income of 15%. This essentially goes toward social security and Medicare.
So let's say you make $100k in profit that means it's $15k in self employment tax.
If you instead become and LLC and file as an S-Corp then self employment tax goes away and is replaced with social security and Medicare on "wages" only. The company then pays you a "reasonable wage" of let's say $30k in this case, and then pays the other $70k out to you as "dividends". The $30k is subject to social security and Medicare which comes to a little under 15% with all things considered (~$4500) and the dividends are not.
This creates a rough tax savings of $10,500.
(Talk to your accountant for exact numbers and advice for your situation, this is just the basic concept.)
Here are some more resources on the subject:
https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/How-an-S-Corp-Can-Reduce-Your-Self-Employment-Taxes/INF22938.html http://www.incorporatecalifornia.com/scorptaxes.html