Somewhere around $60,000–$80,000 of profit, every LLC owner hears the same advice: "elect S corp status and stop paying self-employment tax." The advice is directionally right and frequently oversold. Here's the actual math.
What the election really changes
As a sole proprietor or single-member LLC, your entire profit is hit with self-employment tax — 15.3% up to the Social Security wage base, 2.9%–3.8% beyond it — on top of income tax. As an S corp, only the W-2 salary you pay yourself bears payroll tax. Distributions above the salary don't.
The savings, then, is payroll tax on the gap between your profit and your salary. Which raises the question the IRS cares about most:
Reasonable compensation isn't optional
You cannot pay yourself $20,000 on $300,000 of profit and call it a day. The IRS recharacterizes low salaries — with payroll taxes, penalties, and interest — based on what you'd pay someone else to do your job. And a too-low salary backfires anyway: it shrinks your 401(k) and retirement plan capacity, your QBI deduction wage limit, and eventually your Social Security benefit. There's an optimal zone, not a race to zero.
The honest break-even
- New costs the election creates: payroll service (~$600–$1,200/yr), a separate S corp return, state minimum taxes (New Jersey S corps owe CBT minimums; New York has fixed-dollar minimums), unemployment insurance, and more administrative discipline — you must actually run payroll, keep basis records, and avoid sloppy owner draws.
- The savings: roughly 14–15% of the profit-minus-salary gap (up to the wage base), fading to ~3% above it.
- Rule of thumb: below ~$70K of steady profit the costs usually eat the savings; above ~$100K with a defensible salary around half of profit, the election typically clears five figures of value every few years. Between those, it's a genuine calculation.
Run your numbers: the free S-Corp Election Calculator screens whether the election deserves a closer look for your profit level.
The New York City catch
NYC does not recognize S corporations. Your federal S corp pays the city's 8.85% General Corporation Tax like any C corp, while an unincorporated business pays the 4% UBT instead — and both interact with the city credits differently. The election that saves $12,000 in New Jersey can be a wash, or worse, for a business operating in the five boroughs. This one detail is the most common S corp mistake we clean up.
Timing and the fine print
The election for a calendar year is generally due by March 15 of that year (late-election relief exists and works, but don't plan on it). Once elected: reasonable comp documented annually, PTET/BAIT decisions each year, health insurance run through the W-2 for 2%+ shareholders, and shareholder basis tracked from day one. The election is a system, not a checkbox.
This article is general information based on rules in effect for 2026, not advice for your specific situation. Thresholds and rules change, and details matter — talk to us (or your own advisor) before acting on anything here.