← All guides · 5 minute read · Print
"You should be an S corp" is common advice. Sometimes it saves thousands. Sometimes it costs more than it saves. Here is how to tell.
How it saves money
As a regular LLC owner, all of your profit is subject to self-employment tax (about 15.3% on most of it). With an S corp election, you pay yourself a reasonable salary through payroll, and payroll taxes apply only to that salary. The rest of the profit can come out as distributions, which are not subject to those taxes.
What it costs
- Running payroll every pay period, with payroll tax filings.
- A separate S corporation tax return (Form 1120-S) each year.
- More bookkeeping discipline and possibly extra state filings.
Those costs often run from about $1,500 to $3,500 a year depending on who handles them.
The reasonable salary rule
The IRS requires S corp owners who work in the business to pay themselves a reasonable salary for the work they do. Paying yourself too little to avoid payroll taxes is a known audit issue. A good starting point is what you would have to pay someone else to do your job.
A rough rule of thumb
An S corp usually starts to make sense when your business profit is comfortably above what a reasonable salary for your role would be, often somewhere around $50,000 to $80,000 or more in profit, depending on your field. Try our S corp savings calculator with your own numbers.
Timing
The election is made on IRS Form 2553. For it to apply for a full tax year, it is generally due within 2 months and 15 days of the start of that year. Late elections are sometimes allowed with a reasonable cause statement.
This is general information, not legal, tax, or financial advice for your specific situation. Every case is different. Always check the dates and amounts printed on your own documents.