Should You Elect S-Corp Status?
Results
Visualization
How It Works
Default LLC (disregarded): SE tax = Profit x 15.3% on the whole amount. S-Corp: only the reasonable salary owes payroll tax (15.3% employer+employee on wages); remaining profit is distributed and avoids the 15.3% (but still owes income tax). The trade-off is payroll compliance cost and the reasonable-salary requirement.
What Should You Do?
Scenario 1: at $50k profit with a $40k salary, savings are small — S-Corp may not be worth the admin. Scenario 2: at $200k profit, savings can exceed $15k. Scenario 3: too-low a salary triggers IRS reclassification and penalties.
Frequently Asked Questions
What is a reasonable salary?
What similar businesses pay for the work you do; document it. The IRS scrutinizes low salaries in S-Corps.
Does S-Corp avoid income tax?
No — distributions still owe income tax; only the 15.3% SE/payroll tax is avoided on the non-salary portion.
When is S-Corp worth it?
Typically once profit clears ~$60-80k and admin costs are covered by the tax saving.
Authoritative References
- IRS — S Corporation Employers — S-Corp payroll and reasonable-compensation rules.
- IRS — Self-Employment Tax — 15.3% SE tax on LLC/sole-prop profit.