S-Corp Savings Guide
How S-Corporation elections reduce self-employment taxes — and who qualifies.
The Problem: Self-Employment Tax Is Expensive
If you're a sole proprietor or single-member LLC, you pay self-employment tax on every dollar of net income. That's 15.3% — covering Social Security (12.4% up to the wage base) and Medicare (2.9% on all net earnings, plus an additional 0.9% above $200K/$250K).
Example: An LLC member with $100,000 in net income pays $15,300 in self-employment tax — on top of income tax. That's money that could stay in your pocket with proper structuring.
The Solution: How S-Corp Elections Save Money
An S-Corporation election allows you to split your income into two categories:
- Reasonable Salary — Subject to payroll taxes (FICA: 7.65% employee + 7.65% employer)
- Distributions — Not subject to self-employment tax
The key insight: As an S-Corp owner, you only pay FICA on your salary — not on distributions. The savings come from the difference between 15.3% self-employment tax and 15.3% FICA on a smaller salary base.
Example: An S-Corp owner with $100,000 in net income takes a $60,000 reasonable salary and $40,000 in distributions. FICA is paid on $60,000 ($9,180), not $100,000 ($15,300). That's $6,120 in annual savings — before considering additional planning opportunities.
Who Qualifies: S-Corp Election Requirements
Not every business should elect S-Corp status. The IRS requires:
- Domestic corporation or LLC electing S-Corp treatment
- No more than 100 shareholders (all must be U.S. citizens or residents)
- One class of stock (no preferred shares or special allocations)
- Eligible entity types — LLCs, corporations, and certain trusts qualify
- Timely filing — Form 2553 must be filed by March 15 (calendar-year entities) or within 75 days of formation
Who Benefits Most?
- LLC members and sole proprietors earning $40K+ in net income
- Consultants, contractors, and professionals with high earned income
- Real estate professionals with active rental income
- Business owners who can document a reasonable salary
Who Should Think Twice?
- Businesses with losses — S-Corp doesn't help if there's no profit to split
- Businesses planning to raise venture capital — VCs prefer C-Corps
- Owners who can't justify a reasonable salary — The IRS scrutinizes this
- Multi-member LLCs with complex allocations — Partnership taxation may be more flexible
The Reasonable Salary Question: What the IRS Expects
The IRS requires S-Corp owners to pay themselves a "reasonable salary" for the services they provide. This is the most audited aspect of S-Corp elections — and the most important to get right.
Factors the IRS considers:
- What comparable businesses pay for similar services
- Your experience, qualifications, and role
- Time and effort devoted to the business
- Business revenue and profitability
- Distributions relative to salary
Red flags:
- Salary significantly below market rate for your role
- Distributions far exceeding salary
- No documentation supporting your salary determination
Alan's approach: We benchmark your salary against industry data, document the rationale, and ensure the split withstands IRS scrutiny. This isn't about gaming the system — it's about paying the right amount, not a penny more.
The Numbers: Potential Savings by Income Level
| Net Income | Reasonable Salary | Distribution | SE Tax Saved |
|---|---|---|---|
| $60,000 | $40,000 | $20,000 | $3,060 |
| $100,000 | $60,000 | $40,000 | $6,120 |
| $150,000 | $80,000 | $70,000 | $10,710 |
| $200,000 | $100,000 | $100,000 | $15,300 |
Note: Savings are approximate and depend on individual circumstances. Consult with Alan to determine your specific situation.
The Process: How to Elect S-Corp Status
- Initial consultation — Alan reviews your current structure, income, and business model to determine if S-Corp election makes sense.
- Entity formation or conversion — If you're a sole proprietor, we form an LLC. If you're already an LLC, we prepare the election.
- File Form 2553 — We handle the IRS filing, ensuring timely submission and proper documentation.
- Payroll setup — We help you establish reasonable salary and set up payroll compliance.
- Ongoing compliance — Quarterly reviews, tax filings, and strategic planning to keep you optimized.
Common Questions
Can I elect S-Corp status mid-year?
Yes, but timing matters. The election must be filed by March 15 for calendar-year entities, or within 75 days of formation for new entities. Late elections are possible but require IRS approval.
What happens if I don't pay myself a reasonable salary?
The IRS can reclassify your distributions as wages, requiring you to pay back taxes, penalties, and interest. Documentation is critical.
Can I handle S-Corp compliance myself?
You can, but payroll compliance, quarterly filings, and reasonable salary documentation require expertise. Most business owners find the time and risk aren't worth the savings.
Next Steps
If you're earning $40K+ as a sole proprietor or LLC member, an S-Corp election could save you thousands annually. But the decision requires careful analysis of your specific situation.
Alan reviews every inquiry personally. If your situation aligns, he'll respond with a direct link to schedule a 15 or 30-minute introductory call to discuss whether S-Corp election makes sense for you.