If you’re a digital creator—whether you’re filming tutorials on YouTube, selling online courses, or running a boutique design studio—you’ve probably seen the buzz around switching from a simple LLC to an S-Corp for tax savings. But most of those “how-to” guides skim right past what really matters: your reasonable compensation. Nail that number, and you unlock thousands in savings. Get it wrong, and you could trigger an IRS audit [which could leave you owing thousands] or leave money on the table.

At Misty Newsome CPA, we help content entrepreneurs like you find that sweet spot. Here’s how.

Myth-Busting: Don’t Fall for the “Half-Profit” Rule

You may have read one of these myths:

• “Just take 50% of your profits as salary and 50% as distributions.”

• “Set your salary at Social Security’s wage base.”

• “Pick a round number—$50K or $80K—because everyone else does.”

[Are these rules of thumb? No, they’re not IRS policy—they’re internet folklore. The courts and IRS guidance are very clear on this subject: your salary must reflect the value of the work you do. If you arbitrarily pick a figure, you risk penalties or a costly “reasonable compensation” dispute.

The IRS-Approved Approaches to Reasonable Compensation

The IRS recognizes three methods for calculating a defensible salary. For content creators—who often wear multiple hats (writing, filming, editing, marketing)—the Cost (Many Hats) Approach is usually best:

1. Cost/“Many Hats” Approach

   • Tally how much you’d pay someone else to handle each role you perform: scriptwriter, on-camera host, video editor, social-media manager, etc.

   • Total those comparable market rates and that becomes your base salary.

2. Comparable-Salary (“Market”) Approach

   • Research what other creators or freelancers with similar revenue, audience size, and deliverables are earning.

   • Use industry surveys, job sites, or professional groups for data.

3. Earnings-Based Approach

   • Compare your net profits to the “reasonable” profit margins in your niche.

   • Back into a salary that leaves you with a typical owner’s return.

Whatever method you choose, document every assumption: save screenshots of job postings, keep copies of market-rate reports, and record the hours you spend in each role. If the IRS ever asks, you’ll have an airtight file.

Beyond Salary: Running the Numbers on Entity Choice

Once your salary is set, it’s straightforward to compare taxes as an LLC (pass-through sole proprietor) versus an S-Corp:

• LLC/Sole Proprietor

  • Pros: Minimal setup, no payroll costs.

  • Cons: All net profit is subject to self-employment tax (~15.3%).

• S-Corp

  • Pros: Salary portion pays payroll tax; distributions are free of self-employment tax.

  • Cons: Payroll fees, bookkeeping costs, possible state-level S-Corp fees.

We run an entity-selection analysis that factors in your specific revenue, payroll costs, state taxes, and our recommended salary. Our team uses this information to project long term cost versus savings and we’ll show you side-by-side comparisons so you can decide with confidence how best to structure your business to meet your long term goals.

Why Working with a CPA Matters

Yes, you could try to piece together market rates and IRS rules on your own—but when you engage Misty Newsome CPA, you get:

• Expert Guidance: We’ve handled hundreds of content-creator cases, so you’re not reinventing the wheel.

• Defensible Documentation: We prepare and store your compensation analysis so it’s audit-ready.

• Ongoing Strategy: We don’t stop at salary. We help you optimize retirement contributions, quarterly projections, and other advanced strategies that compound savings year after year.

Ready for Your Reasonable-Comp Audit?

Switching to an S-Corp can save you thousands—but only if you pay yourself correctly. At Misty Newsome CPA, our Reasonable-Compensation Audit is a simple $500 service that delivers:

1. A market-validated salary recommendation.

2. Documentation you can file away.

3. Side-by-side LLC vs. S-Corp tax projections.

Book your audit today and make sure every dollar you earn works for you, not Uncle Sam.

We help with the stuff behind the scenes so you can make informed financial decisions, look at the big picture, and focus more on the fun parts of running your business.

You can also visit our website to book that call, and check us out on our other platforms:

@newsomecpa on Threads

@MistyNewsomeCPA on YouTube

Misty Newsome CPA LLC on Facebook

@newsomecpa on Instagram

Misty Newsome on LinkedIn