S-corp election: when the salary math pays and when it does not

The S-corp election is the most common tax question we get from owners of profitable LLCs, and the answer depends on three numbers: your profit, a reasonable salary for the work you do, and the extra cost of running payroll and filing a separate return.

How the saving works

As a sole proprietor or single-member LLC, all of your profit is subject to self-employment tax. As an S-corp, you pay yourself a salary through payroll, and only the salary carries Social Security and Medicare taxes. The rest of the profit passes through as a distribution without them.

The reasonable salary

The IRS expects the salary to match what you would pay someone else to do your job. Set it too low and the saving can be reversed on audit. We set it from local wage data for the role and document how we got there, which matters more than the number itself.

When it does not pay

The election adds costs: a payroll service, a business return, state filings and our time. Below roughly $60,000 to $80,000 of profit, those costs usually eat most of the saving. It also makes less sense if profit swings widely from year to year.

Timing

For a calendar-year business, Form 2553 is due by March 15 for the election to apply to that year. A late election can often still be accepted with a reasonable-cause statement, but it is easier to decide in January. If you want the numbers run for your own business, bring last year’s return to a first call.