S-Corp Election: What Business Owners Should Compare

Start with a complete comparison

An S-Corp election can change how business income is taxed, but a useful comparison includes the whole cost of operating the structure. Compare the current entity with the proposed structure using the same revenue, expenses, owner duties, and compensation assumptions.

An S corporation generally passes income and losses through to shareholders for federal tax purposes. It must meet eligibility requirements and make the election; it is not simply a different label for an owner draw. IRS S corporation overview.

Salary has to reflect the work

An owner who performs services must receive reasonable compensation before treating payments for those services as non-wage distributions. The appropriate salary depends on the facts, including duties and the source of business receipts. Selecting an artificially low salary to maximize a spreadsheet's savings is not a sound starting point. IRS reasonable compensation guidance.

Put the added costs in the model

Ask your CPA and payroll provider for estimates covering payroll, the business tax return, bookkeeping, state filings, and ongoing administration. Also model retirement contributions, health insurance treatment, and any applicable deductions rather than assuming one tax benefit settles the decision.

For California, the Franchise Tax Board generally applies a 1.5% S corporation tax and an $800 minimum franchise tax, subject to exceptions. The federal election does not erase state-level costs. California FTB S corporation guidance.

Questions to resolve before electing

1. Is the entity eligible, and what election deadline applies?
2. What salary is supportable for the owner's actual work?
3. What changes in a lower-profit year?
4. How much additional cash and administrative time will the structure require?
5. How does compensation affect the Solo 401(k) contribution plan?
6. Could an upcoming business sale change the decision?

Have the CPA document the assumptions, projected costs, and responsibilities before the election is filed. That makes the decision easier to revisit as the business changes.

Planning your next step

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This is educational information, not personalized tax, legal, or investment advice. See disclosures.