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Key takeaways
- An S-corp lets you split profit into salary (subject to payroll tax) and distributions (not subject to it).
- The salary must be reasonable for the work you do — that single rule drives most of the math.
- Payroll costs, an extra return, state taxes and a smaller QBI deduction eat into the savings.
- For a calendar-year business, the election is generally due by March 15 to apply for that year.
"Should I become an S-corp?" is one of the most common questions we get from growing freelancers and owners of single-member LLCs. The honest answer is that it depends on your profit, your state and what you'd reasonably pay someone to do your job. Here's how to think it through.
How the savings work
As a sole proprietor or single-member LLC, all of your net profit is subject to self-employment tax — 15.3% up to the Social Security wage base, and 2.9% (plus possibly 0.9%) above it.
An S-corporation is a pass-through entity: the profit still flows to your personal return. The difference is that you become an employee of your own company. You pay yourself a salary through payroll, with Social Security and Medicare withheld and matched. Whatever profit is left can be taken as a distribution, which is subject to income tax but not payroll tax.
That difference — payroll tax on the salary only, instead of self-employment tax on everything — is the entire source of the savings.
A worked example
Take a consultant with $150,000 of net profit who could reasonably pay themselves a $70,000 salary. Federal numbers only, rounded:
| Sole proprietor | S-corporation | |
|---|---|---|
| Payroll / self-employment tax | About $21,200 | About $10,700 on the salary |
| Payroll tax difference | — | About $10,500 lower |
| Effect on QBI deduction | Larger deduction | Smaller — salary isn't QBI |
At first glance that's $10,500 saved. But the salary itself isn't qualified business income, so the 20% QBI deduction shrinks. In this example the lost deduction could cost roughly $3,000 to $4,000 in income tax, depending on your bracket. Then subtract the new costs below. A realistic net benefit here might be in the $4,000 to $6,000 range — worthwhile, but far from the "save $20,000" pitches you'll see online.
The costs people forget
- Payroll. You'll need a payroll provider, quarterly payroll returns and year-end W-2s.
- A second tax return. The S-corp files Form 1120-S, due March 15 for calendar-year companies, and issues you a K-1.
- State taxes and fees. Some states charge S-corps an entity-level tax or minimum fee. California, for example, imposes a 1.5% franchise tax with an $800 minimum.
- Unemployment insurance on your own salary in most states.
- Less flexibility. S-corps allow only one class of stock and limit who can be a shareholder, and taking assets out of an S-corp can create taxable gain.
When it usually makes sense
There's no universal threshold, but the election tends to pay off when:
- Profit is consistent and comfortably above what a reasonable salary for your role would be.
- You're not already above the Social Security wage base through another W-2 job (if you are, the savings are much smaller).
- Your state doesn't add costs that wipe out the benefit.
- You're prepared to run payroll every month and keep business and personal money strictly separate.
It rarely makes sense for businesses with thin or unpredictable profits, or where the reasonable salary would absorb most of the profit anyway — which is common in professions with high market pay.
How to make the election
An eligible LLC or corporation elects S status by filing Form 2553. To apply to the current year, it's generally due no more than two months and 15 days after the start of the tax year — March 15 for a calendar-year business — or at any time during the prior year. If you miss the deadline, the IRS offers a simplified late-election relief procedure when you have reasonable cause, and it's often worth using.
Before you file, set your salary with documentation. That's the part the IRS scrutinizes most — see reasonable compensation for S-corp owners.
This article is general information, current as of September 2026, and isn't tax advice for your situation. Figures are federal unless noted, and indexed amounts change each year — confirm current numbers with your tax pro before acting.