LLC S-Corp Election:
When It Saves You Money (and When It Does Not)
At $100,000 income the S-Corp election saves roughly $1,700/year after compliance costs. Below $60,000, you lose money. Here is the math at every income level.
How S-Corp Election Works
Without S-Corp Election
All $100,000 net income flows to Schedule C. You pay 15.3% SE tax on the full amount (actually 14.13% because of the 92.35% multiplier). Total SE tax: $14,130.
With S-Corp Election
You split $100,000 into $55,000 salary (SE tax applies) and $45,000 distribution (no SE tax). Total FICA: $8,415. Gross saving: $5,715. Minus $4,000 compliance: net $1,715.
The Break-Even Table
Representative examples. Actual numbers depend on salary allocation and state. Numbers in red = S-Corp costs more. Numbers in green = S-Corp saves money.
These are illustrative examples, not tax advice. Consult a CPA before making any elections.
| Net Income | Reasonable Salary | SE Tax (Sole Prop) | FICA (S-Corp Salary) | Gross Saving | Compliance Cost | Net Benefit |
|---|---|---|---|---|---|---|
| $40,000 | $25,000 | $5,652 | $3,825 | $1,827 | $4,000 | -$2,173 |
| $60,000 | $36,000 | $8,478 | $5,508 | $2,970 | $4,000 | -$1,030 |
| $75,000 | $45,000 | $10,598 | $6,885 | $3,713 | $4,000 | -$287 |
| $100,000 | $55,000 | $14,130 | $8,415 | $5,715 | $4,000 | +$1,715 |
| $150,000 | $80,000 | $19,645 | $12,240 | $7,405 | $4,000 | +$3,405 |
| $200,000 | $110,000 | $22,971 | $16,830 | $6,141 | $4,000 | +$2,141 |
Methodology: SE tax = 15.3% x 92.35% of net income (SS capped at $168,600). FICA on salary = 15.3% of reasonable salary (SS capped). Compliance cost assumed at $4,000/year (payroll service $900-$1,800 + Form 1120-S prep $800-$2,200). Numbers are representative examples, not individualised advice.
Calculate Your Break-Even
Enter your income and adjust the salary percentage to see your specific numbers.
S-Corp Break-Even Calculator
Does the election actually save you money?
Salary: $50,000
Sole Prop SE Tax
$14,130
S-Corp FICA on Salary
$7,650
Net Benefit After Compliance
+$2,480
SE tax: 15.3% (Social Security 12.4% up to $168,600 + Medicare 2.9%). Compliance cost covers payroll service + Form 1120-S prep. This is an estimate, not tax advice.
Reasonable Salary: What the IRS Looks At
The IRS requires S-Corp owner-employees to pay themselves a salary that reflects fair market compensation for the services they provide. There is no formula -- they compare to industry data.
Industry wage data
IRS looks at BLS (Bureau of Labor Statistics) wages for similar roles. A software developer S-Corp owner should be paid similarly to a salaried developer in their region.
Time and duties
How many hours you work and what functions you perform matter. If you are a part-time consultant, your salary should reflect part-time hours.
Business size and revenue
A solo operator generating $80k should pay a different salary than one generating $500k. Salary must be proportional to the work you contribute.
Comparable wages paid to others
If your business pays contractors similar rates, the IRS may use that as a benchmark for what your own reasonable salary should be.
The Risk of Setting Salary Too Low
The IRS specifically audits S-Corp owner-employees with suspiciously low salaries. Getting caught means back taxes, penalties, and interest. A salary of $1/year on $300k of income is a near-certain audit trigger. Tax professionals generally suggest 40%-60% of net income as a conservative starting point for service businesses.
What the $4,000 Compliance Estimate Covers
| Cost Item | Low | High | Notes |
|---|---|---|---|
| Payroll service | $600 | $1,800 | Gusto, ADP, Paychex. Owner + no other employees. |
| Form 1120-S tax prep | $800 | $2,200 | Annual S-Corp return. More complex than Schedule C. |
| State registration fees | $100 | $800 | State annual report or franchise fee. |
| Quarterly payroll filings | $0 | $400 | Some payroll services include this. Some charge extra. |
| Total | $1,500 | $5,200 | Mid-point ~$3,500-$4,000 for typical solo operator. |
Prices as of April 2026. Your actual costs depend on payroll provider, CPA rates in your area, and state fees.
Filing Deadlines for Form 2553
New LLC
Within 75 days of formation
File Form 2553 within 75 days of the LLC's formation date to have the election apply from formation. After 75 days, the election applies to the following tax year.
Existing LLC (current year)
By March 15 of the tax year
To apply S-Corp election to the current calendar year, file Form 2553 by March 15. For a fiscal year LLC, the deadline is the 15th day of the third month of the tax year.
Late election relief
Revenue Procedure 2013-30
If you missed the deadline but have reasonable cause, late election relief is available. Your tax professional can help file with the required statement of reasonable cause.