Ask five accountants when to elect S-Corp status and you'll get five different answers. The real answer is: it depends on the math for your specific business. Here's how we think about it.
What the S-Corp election actually does
An S-Corp isn't a different kind of business — it's a tax election. Your underlying LLC or corporation stays the same. What changes is how the IRS taxes you. As a default LLC or sole proprietor, every dollar of profit is subject to self-employment tax (15.3% on the first ~$168,000 and 2.9% above that). As an S-Corp, you pay yourself a "reasonable salary" subject to payroll taxes, and the remaining profit passes through as distributions — which are not subject to self-employment tax.
The break-even math
The election creates real savings, but it also creates real costs: you now have to run payroll, file additional returns, and generally hold yourself to a higher standard of recordkeeping. For most home service businesses, the rough break-even is around $60,000 to $80,000 in net profit after you've paid yourself a reasonable salary.
What "reasonable salary" really means
The IRS expects S-Corp owners to pay themselves a salary that reflects what they'd pay someone else to do their job. For a working owner of a plumbing business, that might be $60,000–$90,000 depending on the region and the scope of the work. Underpaying yourself to maximize distributions is one of the most common audit triggers in closely-held businesses.
When S-Corp isn't the right move
- You're still early and profit is inconsistent year to year.
- You plan to leave profits in the business for reinvestment rather than distribute them.
- You want to add outside investors — S-Corp shareholder rules are restrictive.
- You're not willing to run formal payroll or keep clean books.
The right structure changes as the business grows. We run the math with every client every year — what was right two years ago may not be right now, and vice versa.
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