S-Corp Election

If you're clearing six figures as a sole proprietor or LLC owner, you might be leaving five figures on the table. An S-Corp election can cut self-employment taxes, and in the right setup it can unlock additional deductions too.

Key numbers

How an S-Corp saves payroll tax

The S-Corp election is a popular tax strategy known for payroll tax reduction. Instead of paying yourself all your profit as self-employment income (which gets hit with the full 15.3%), you elect S-Corp, pay yourself a reasonable W-2 salary, and take the rest as a distribution. The W-2 salary pays payroll taxes. The distribution does not.

As a sole proprietorship, making $750,000 means paying about $47,500 in self-employment tax. As an S-Corp paying a $150,000 salary, payroll tax drops to about $23,000. The other $600,000 passes through as a distribution, untaxed by payroll. That's roughly $24,500 a year in savings.

When it makes sense (and when it doesn't)

Whether S-Corp makes sense depends on more than just the payroll savings. Additional costs, local rules, and your business type all matter.

1. Costs: S-Corps require running payroll and filing an S-Corp tax return (Form 1120-S). Budget $2,500–$5,000/yr in added overhead.

2. Local rules: Most states follow federal S-Corp treatment, but not all. A few states and cities don't recognize the S-Corp election at all — they tax your business as a corporation, which in some cases can add up to ~9% on net income. Others recognize the election but impose their own entity-level tax, often 1–2%. California recognizes S-Corps but adds a 1.5% entity-level tax on net income. Federal S-Corp benefits still apply, but there's an extra obligation at the state level. On the other hand, the S-Corp also unlocks California's pass-through entity tax (PTET) election, which can create significant federal deductions.

3. Your business type: SSTBs (Specified Service Trades or Businesses: law, accounting, medicine, consulting, financial services) face a complete QBI phase-out at higher incomes, while non-SSTBs (product businesses, tech, real estate, engineering) can still claim the deduction, but only through establishing wages.

The S-Corp has costs and tradeoffs. Only after considering overhead, local rules, and potential unlocked deductions can you determine if it makes sense. At lower income levels, payroll savings are often the main benefit — but if the costs exceed the savings you're worse off. And at higher income levels, the unlocked deductions can be worth more than the payroll savings, making the S-Corp less about what you save in payroll and more about what it enables.