If your business profit has grown past the point where self-employment tax stings, someone has probably told you to “just go S-Corp.” Sometimes that's great advice. Sometimes it costs you more than it saves. Here's how to actually think about it.
What an S-Corp election really is
An S-Corp isn't a different kind of company — it's a tax election. Your LLC keeps operating exactly as it does today; you're asking the IRS to tax it differently. Instead of all profit flowing to you as self-employment income, you pay yourself a reasonable salary (which is subject to payroll taxes) and take the rest as distributions (which aren't).
That gap — payroll tax on the salary only, instead of self-employment tax on everything — is where the savings live.
When it starts making sense
As a rough rule of thumb, the election starts to be worth discussing when your business consistently nets $60,000–$80,000 or more per year after expenses. Below that, the savings are usually eaten by the new costs an S-Corp brings:
- Running actual payroll for yourself (software or a payroll service, filings, a W-2)
- A separate business tax return (Form 1120-S) each year
- Bookkeeping that's clean enough to support all of the above
The “reasonable salary” trap
The IRS requires your salary to be reasonable for the work you do — you can't pay yourself $12,000 and take $150,000 in distributions. Set it too low and you're inviting an audit; set it too high and you erase the savings. Getting this number right for your industry and role is exactly the kind of judgment call a CPA earns their fee on.
When we tell clients not to elect
- Profit is inconsistent or under the threshold
- The business is a side income next to a W-2 job
- You reinvest almost everything and take little out
- You aren't ready to keep payroll and books current every month
What it looks like to switch
The election is made on Form 2553, generally due within 2 months and 15 days of the start of the tax year you want it to apply to (late-election relief exists, but it shouldn't be the plan). From there: payroll gets set up, your bookkeeping cadence gets a little more serious, and your tax season includes an 1120-S.
The honest answer
Whether an S-Corp saves you money is a math problem, not a trend. Bring us a year of numbers and we'll run it both ways — if the election doesn't clearly win, we'll tell you to keep it simple.