"Should I be an S-corp?" is the most common question we get from owners crossing $100,000 of profit, and the honest answer is a number, not a yes. The election saves self-employment tax on the slice of profit above a reasonable salary and costs a fixed amount to run. Above the line it wins; below it, the default LLC wins on simplicity and cost.
Where the saving comes from
A default LLC owner pays 15.3% self-employment tax on essentially all profit up to the wage base. An S-corp owner pays the same 15.3% (as payroll tax) only on salary, and nothing on distributions. On $150,000 of profit with a $70,000 salary, roughly $80,000 of distributions escape the tax: about $11,000 saved before costs. The saving grows with profit until the Social Security wage base ($184,500 in 2026), then flattens to the 2.9% Medicare portion.
What it costs
- Payroll for the owner: a payroll service at $500 to $1,200 a year, plus quarterly 941s, an annual 940 and W-2s.
- A separate return, Form 1120-S with K-1s, due March 16.
- Stricter bookkeeping: a real balance sheet, owner draws booked as salary or distribution, basis tracked.
- State fees and, in some states, an entity-level tax.
Realistically $1,500 to $2,500 a year all in. The saving has to exceed that with room to spare.
The line
With a reasonable salary set honestly, the election usually starts paying at $50,000 to $60,000 of profit above the salary. For most service businesses that means total profit around $120,000 or more. Below $80,000 of profit it is almost never worth it; the salary would have to be unreasonably low to create a saving.
Reasonable salary
The saving depends on the salary being lower than profit, and the IRS requires the salary to be what you would pay someone else to do the job. Comparable salaries, hours worked and the business's own hiring costs are the evidence. A $20,000 salary on $200,000 of profit is the audit case; reclassification means back payroll tax, penalties and interest on the distributions.
States that change the answer
California taxes S-corps at 1.5% of net income (minimum $800). New York City does not recognise S status and taxes the entity. Tennessee applies its excise tax to S-corps. New Hampshire's business profits tax hits them. In those places the saving shrinks and sometimes disappears; run the numbers with the state included.
Who cannot elect
Non-US persons cannot be S-corp shareholders. A foreign-owned LLC stays a default LLC (disregarded or partnership) or elects C-corp status. Corporations with more than 100 shareholders or more than one class of stock are also out.
Timing
Form 2553 by March 16 for the current year, or any time during the previous year. Late elections with reasonable cause are routinely accepted under Revenue Procedure 2013-30, so a missed date is usually fixable back to the start of the year.
The check: last year's profit minus what you would honestly have to pay a replacement. If the difference is under $50,000, stay as you are and revisit next year.