How an S-Corp election can save you thousands (and when it can’t)
The short version
- An S-Corp can cut self-employment tax by splitting income into salary + distributions.
- Only your "reasonable salary" is hit with the 15.3% — distributions are not.
- It usually starts paying off once net profit clears roughly $75k–$100k.
- Extra payroll and filing costs (~$1–3k/yr) can wipe out savings below that.
The S-Corp is one of the most over-hyped and most misunderstood moves in US small-business tax. Used at the right time, it genuinely saves real money every year. Used too early, it can cost more than it saves. Here's the actual mechanism, in plain numbers.
Where the saving comes from
As a sole proprietor or default LLC, your entire net profit is subject to self-employment tax — 15.3% for Social Security and Medicare — on top of income tax. On $150,000 of profit, that's over $20,000 before income tax even enters the room.
An S-Corp election changes how that profit is split. You pay yourself a reasonable salary (which is subject to the 15.3%), and take the rest as distributions (which are not). The income tax is broadly similar either way — but you've shrunk the slice exposed to that 15.3% payroll tax.
The "reasonable salary" rule you can’t skip
The catch: the IRS requires that salary to be reasonable for the work you do. Pay yourself $0 and take everything as distributions, and you're inviting an audit. Pay yourself too much and you've erased the benefit. Getting this number right — defensible, documented, and optimised — is the entire game.
When it does NOT pay off
An S-Corp brings real overhead: you have to run payroll, file extra returns (including Form 1120-S), and often pay for bookkeeping and a payroll provider. That's commonly $1,000–$3,000 a year. Below roughly $75,000–$100,000 of profit, those costs can swallow the tax you'd save. There are also state-level wrinkles — a few states levy their own S-Corp taxes or fees — and your QBI deduction can shrink.
So should you do it?
If your profit is comfortably into six figures and steady, an S-Corp election is often one of the highest-return tax moves available to you. If you're early or your income is lumpy, it may be premature. The only honest answer is to run your numbers.
That's exactly what our free S-Corp calculator does — and if it looks worth it, we'll confirm the reasonable-salary figure and handle the election and payroll for you.
Want to see your number? Try the free S-Corp savings calculator, then book a call and we’ll confirm it properly.
