Business
S-Corp Election: How It Saves You $5,000-$30,000 in 2026
When you elect S-corp status for your LLC or corporation, you split your business income into two categories: reasonable salary (subject to payroll taxes) and distributions (not subject to payroll taxes). The 15.3% self-employment tax (Social Security 12.4% + Medicare 2.9%) only applies to the salary portion. By paying yourself a reasonable salary and taking the remainder as distributions, you can save thousands in payroll taxes.
Who Qualifies
- Self-employed with net business income above $60K-$80K (below this, S-corp costs may exceed savings)
- Consistent business income (not variable/one-time projects)
- Willing to run payroll and file quarterly payroll tax returns
Who does NOT qualify
- Net business income below $50K (S-corp costs eat the savings)
- Non-US citizens in some cases
- Businesses with multiple classes of stock or more than 100 shareholders
How the Math Works
As a sole proprietor: $250K × 15.3% SE tax (up to SS cap) + 2.9% Medicare on all = ~$26,600 in payroll taxes. As an S-corp with $120K reasonable salary: payroll taxes on $120K = ~$14,600. Distributions: $130K with no payroll tax.
S-corp savings: $26,600 - $14,600 = $12,000/year in payroll taxes. Plus the QBI deduction applies to the distribution portion.
Legal Basis & IRC Citations
- IRC §1361: S corporation defined
- IRC §1362: Election of S corporation status
- IRC §1368: Distributions from S corporations
What to Tell Your CPA
“My LLC has net business income of $[amount]. I'd like to discuss electing S-corp status. Can you help determine a reasonable salary, estimate the payroll tax savings, and confirm whether the S-corp administrative costs are worth it at my income level?”
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Frequently Asked Questions
What is a reasonable salary for an S-corp owner?
The IRS requires you to pay yourself a 'reasonable salary' for the work you do, comparable to what you'd pay someone else for the same role. A common range is 40-60% of net business income, but it depends on your industry, hours, and comparable salaries. Your CPA can help determine the right number.
When does an S-corp make sense?
Generally when net business income exceeds $60K-$80K consistently. Below that, the cost of running payroll, filing S-corp tax returns, and additional accounting fees can eat up the payroll tax savings.
How do I elect S-corp status?
File Form 2553 with the IRS. The deadline is March 15 for the current tax year (or within 75 days of forming the entity). Late elections may be accepted with reasonable cause.
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