If your business consistently nets more than about $60,000/year, electing S-Corp status can save thousands in self-employment tax. Below that threshold, the extra payroll and filing costs usually cancel out the benefit.
This is one of the most common questions we get from new business owners: "Should I be an LLC or an S-Corp?" The short answer is that it's not actually a choice between two entity types — an S-Corp is a tax election you can make on top of an LLC (or a corporation). The real question is: how should my business be taxed?
How a default LLC is taxed
A single-member LLC is treated as a "disregarded entity" — the IRS ignores the LLC and treats all the profit as your personal income on Schedule C. Every dollar of net profit is subject to:
- Federal income tax at your bracket (10–37%)
- Self-employment tax of 15.3% (Social Security + Medicare) on the first $168,600 of net profit, then 2.9% above that
- State income tax (Missouri: up to 4.95%)
The 15.3% SE tax is the one that stings. On $100K of net profit, that's roughly $14,130 — on top of your income tax.
How an S-Corp is taxed
When you elect S-Corp treatment (Form 2553), the IRS requires you to pay yourself a "reasonable salary" as a W-2 employee of your own company. Payroll tax (15.3%) is only charged on that salary. Profit above the salary flows through to you as a distribution — not subject to SE tax.
The math on $120K of net profit
Imagine your business nets $120,000. A reasonable salary for your role, say, $70,000:
- As a default LLC: ~$14,130 SE tax on the first $168,600 of profit → roughly $17,640 total payroll-type tax on $120K.
- As an S-Corp: 15.3% on $70K salary = $10,710. The remaining $50K distribution has no SE tax.
- Annual savings: roughly $6,900, before planning costs.
The cost of an S-Corp (what eats into the savings)
- Payroll setup and processing — ~$600–1,500/year
- Separate tax return (Form 1120-S) — typically $900–1,500
- Quarterly payroll tax filings (941s)
- State-level S-Corp tax or franchise fees (varies by state)
- Stricter recordkeeping — owner draws must be clearly separated from salary
All-in, add-on costs are usually $2,000–3,500/year. You need enough SE-tax savings to clear that number.
The "reasonable salary" rule
The IRS has challenged S-Corp owners who pay themselves $0 or $10,000 salaries while taking the rest as distributions. If you provide real services to your business, you must take a salary that reflects what you'd pay someone else to do your job. Guidelines we use:
- Look at BLS wage data for your occupation and region
- Compare to what similar-sized businesses in your industry pay
- As a rule of thumb, salary should typically be at least 40–60% of profits if you're actively working in the business
When an S-Corp makes sense
- You net $60K+ consistently from the business
- You can afford payroll and tax filing costs
- Profits are relatively predictable year to year
- You're not trying to maximize Social Security benefits later (S-Corp lowers the income counted toward SS)
When it doesn't
- Net profit is under $50K — compliance costs usually eat the savings
- Income is highly unpredictable (big salary in a down year is a problem)
- You plan to raise outside capital or add non-U.S. resident owners — S-Corps have strict shareholder rules
- You want to contribute the maximum to a Solo 401(k) — both structures allow it, but the math is different
The best entity choice depends on your numbers, your industry, and your plans. A $3,000 tax projection now can save $30,000 over a decade.
Timing: when to file Form 2553
To elect S-Corp treatment for the current tax year, you generally must file Form 2553 within 2 months and 15 days of the start of the year (so March 15 for a calendar-year business). You can also make a late election in certain situations — we file these regularly.
If you're wondering whether S-Corp is right for your business, the math is easy once we have your projected profit. Schedule a free consultation and we'll run the numbers.