The S-corp election typically starts making sense somewhere around $60,000 to $80,000 of net profit. Below that range, the added complexity and costs usually eat into your savings. Above it, the savings grow meaningfully with income.

Here’s why it works. As a sole proprietor, you pay self-employment tax of 15.3 percent on your entire net profit. That covers Social Security (12.4%) and Medicare (2.9%), and it applies to every dollar of profit whether you take it home or leave it in the business.

An S-corp lets you split that profit two ways. You pay yourself a reasonable W-2 salary, which is subject to payroll taxes at the same combined rate. But the remaining profit comes out as a distribution, and distributions are not subject to self-employment tax. Your savings come from that distribution portion.

Say you have $120,000 of net profit. As a sole proprietor, you’d pay roughly $18,000 in self-employment tax on all of it. As an S-corp owner paying yourself a $70,000 salary, you’d pay payroll taxes on the $70,000, but the remaining $50,000 distribution escapes the 15.3 percent. That’s over $7,000 in savings on the distribution portion alone. The actual numbers depend on your situation, but the pattern holds.

The IRS requires that salary to be “reasonable” for the work you do. Paying yourself $30,000 while taking $90,000 in distributions catches attention. The IRS specifically targets S-corp owners who underreport their salary to minimize payroll taxes. This is the most audited issue with S-corps, so getting the salary right matters.

The election also adds complexity. You’ll need to run payroll for yourself throughout the year, which means payroll tax deposits and filings. The S-corp itself files a separate tax return (Form 1120-S) annually. And your bookkeeping needs to be more structured to track the salary, distributions, and shareholder basis properly.

Whether the savings outweigh the added work depends on your income level and what you’re willing to manage. At $50,000 of profit, the savings might be $2,000 or $3,000 but you’re adding payroll costs, entity return prep fees, and bookkeeping complexity. At $150,000, the savings can easily be $10,000 or more, which makes the overhead worthwhile.

Simona at Smart Outsourced Solutions works with consultants on this decision regularly as part of tax strategy planning. As a CPA and Enrolled Agent, she can help you run the numbers for your specific situation and determine whether the election makes sense. If you do elect, she handles the small business bookkeeping and payroll that an S-corp requires, and prepares your personal tax return where the S-corp income flows through. The firm does not prepare the S-corp’s entity return (Form 1120-S), so you would need a separate preparer for that piece.

If you’re approaching that $60,000 to $80,000 range or already past it, it’s worth a conversation to see whether the math works in your favor. The savings can be real, but only if you set it up right and maintain reasonable compensation.