The S-Corp Election Is Arithmetic, Not a Strategy

Every owner has been told to elect S-corp and save on taxes. Almost none of them have been shown the arithmetic.

The only real saving is self-employment tax: the 15.3% you stop paying on the slice of profit you take as a distribution instead of as W-2 wages.

On the other side of the ledger sit the costs nobody mentions upfront. A payroll service, a separate 1120-S return, state minimum and franchise fees, and the wrinkle that paying yourself wages shrinks your QBI deduction.

Run both columns and the break even usually lands somewhere around $70,000 to $80,000 of net profit. Below that the fees eat the savings, and well above it the election is usually obvious.

Here’s the part that surprises people: the number that decides it is reasonable compensation, not revenue. If your labor is the business and honest reasonable comp absorbs nearly all the profit, there’s no distribution left to save anything on.

Entity choice is a modeling exercise, not a default, and with QBI now permanent it’s a ten year decision rather than a bet on a sunset.

‘Before you file the election, ask to see the two column math. If nobody can show you the break even, that isn’t advice.

Let’s nail down the process together, drop an email or message to connect!