Instead of taxing the corporation for its profits and then also taxing the owners at their individual level for their earnings (i.e., double taxation) the corporate profit of an S corp is passed through to the owners so they are only taxed once.
By way of example, without an S Corp election, if a company has two owners and has a profit of $1,000,000, then the corporation pays taxes on the $1,000,000. For this example, let’s say the corporation pays $300,000 in taxes. Then, the remaining $700,000 is distributed to the two owners. The two owners would then pay tax on their share of the $350,000 at their taxable rate. For this example, let’s say the taxable rate for the individuals is 30%, so each individual pays taxes of $105,000 leaving the net amount to the owners of $245,000 each.
If there was an S Corp election, there is no tax at the corporate level on the $1,000,000. As a result, $500,000 is distributed to each owner. The owner is then taxed at the individual level for their $500,000. If the same tax rate of 30% is used, then the tax paid is $150,000 by each owner meaning each owner nets $350,000. Both owners saved more than $100,000 by taking this one step.