Lauren’s CPA said it at the end of a meeting, almost as an afterthought: “You might want to look at an S-corp election.”
She wrote it down and starting Googling immediately after the meeting was over. By the time she got back to her desk, she had seventeen browser tabs open and still wasn’t sure what she was deciding.
Four years into her consulting practice with a net income over $90,000 last year and tracking higher this year. One contractor, no employees, and a single-member LLC she’d set up when she first launched. The S-corp question felt like it should have a clear right answer, and that she should already know what it was.
There is a right answer. It’s just not the same answer for everyone, and getting there requires asking a few questions most of those browser tabs won’t cover.
What the S-Corp Election Actually Is
The S-corp election is a tax designation, not a separate business entity. If you’re already an LLC, you’re not forming a new company and you’re not changing your liability protection. All of that stays with the LLC. You’re simply telling the IRS to tax you differently.
Here’s how it works: you pay yourself a reasonable W-2 salary, and any net profit above that salary can be taken as a distribution. Distributions aren’t subject to self-employment (SE) tax, but they’re still taxable income on your personal return. The election changes how you’re taxed, not whether you’re taxed.
In 2026, self-employment tax runs at 15.3% on the first $184,500 in net self-employment income, and 2.9% on earnings above that threshold.
At $90,000 in net income, a well-structured S-corp election might meaningfully reduce the SE tax you’d otherwise owe on the full amount. Whether that savings clears the cost of the structure is a separate question, and the one people can skip right past.
What You’re Actually Committing To
The S-corp election isn’t a switch you flip on and off. A few things worth understanding before you decide.
The re-election restriction
It is possible to revoke an S-corp election, but once you do, you generally must wait five tax years before electing S-corp status again. If it doesn’t make sense later (your income drops, your business changes) you can technically exit the structure.
But getting out isn’t free, and getting back in takes years. You still owe the S-corp return for any year the election was active. IRS revocation paperwork is required and state-level costs may apply. That combination of the cost to exit and the wait to re-enter is why the decision rewards patience over speed.
Consistent net income above the threshold
The election earns its keep when your net income is reliably in the range where the SE tax savings outweigh the administrative cost. Many advisors use a rough benchmark of $60,000 to $100,000 in net business income as the entry point. Net income is the number that matters, not top-line revenue.
We’ve worked with a business owner whose revenue was well over $100,000 but whose net income after expenses was roughly $10,000. Her SE tax savings came to a few hundred dollars, less than what the S-corp return cost to prepare and file. She was running payroll in months when the business was operating at a loss.
The structure wasn’t wrong legally. But the math didn’t math. If you’re near the lower end of the net income range and your margins fluctuate, you may be paying for the structure in years when it doesn’t generate enough savings to justify it.
A separate business tax return
An S-corp files its own return (Form 1120-S) in addition to your personal return. More complexity, more cost, every filing season.
Formal payroll
You need to run actual payroll, not just transfer money and call it a salary. Payroll platforms such as Gusto can handle much of the administrative work, including payroll tax filings and year-end W-2 reporting. If you’ve never run payroll, it’s a change to how you operate. Not complicated, but real.
Reasonable compensation
The IRS requires you to pay yourself a salary that reflects what you’d pay someone else to do what you do. There’s not a fixed formula and it depends on your industry, your role, and what comparable positions pay in your market. Your CPA will typically reference salary surveys and what’s defensible given your situation. The goal is a number that’s intentional and documented.
State rules vary
Some states add their own taxes on top. In Texas, the franchise tax applies to LLCs regardless of whether you’ve made an S-corp election. It’s the LLC structure that triggers it, not the federal tax designation. Be sure to check your state’s rules before you file.
None of this is a reason to avoid the election. It’s a reason to do it right, in the right year, with the right setup in place.
What Else Is Downstream
Of course the tax conversation is rarely just about taxes. The structure you put in place has implications across your entire financial picture. That can lead to several other planning conversations:
On retirement
Many contribution limits are tied to W-2 compensation, not total business income. A founder who’s been running as a single-member LLC may have been leaving meaningful tax-advantaged room on the table for years without knowing it.
On insurance
Most group long-term disability policies cover 60% of documented W-2 earnings, often with a monthly dollar ceiling. If your income has grown but your W-2 hasn’t, the gap between what you earn and what you’d be covered for in a disability event can be significant.
On health insurance
As an S-corp owner-employee, your premiums run through payroll and are then deducted on your personal return. More formal than the self-employed deduction a sole proprietor uses, and it changes how you set up benefits once payroll is in place.
On Social Security
Social Security benefits are based on earnings subject to Social Security taxes. S-corp distributions generally don’t count toward that earnings record. A comp structure optimized purely for short-term tax savings can erode the benefits you’re building over time.
On estate
Business ownership decisions can also show up in estate and succession planning. How the interest is owned, valued, and eventually transferred may matter well beyond the tax return.
This is where Tannery Company’s coordinated approach matters. Tax, accounting, and wealth management decisions can be considered together instead of in isolation.
Three Signs the Conversation Is Timely
1. Your net income has consistently exceeded $60,000 to $100,000. One strong year on its own isn’t the signal. Two or three is. Or a clear projection of sustained growth.
2. You’re considering an S-corp but haven’t modeled reasonable compensation. Salary is a central part of the analysis. Before making the election, you should understand what reasonable compensation could look like for your role and how that affects the economics of the decision.
3. Your retirement contributions haven’t kept pace with your income. If your savings rate hasn’t grown with your revenue, comp structure is often a factor.
Q4 Is a Good Time to Start the Conversation
The standard deadline for a calendar-year business seeking S-corp treatment effective January 1 is generally March 15 of that year. Late-election relief may be available when certain requirements are met, so missing the deadline doesn’t automatically settle the question.
For business owners considering a change for the coming year, Q4 is a useful time to model the economics, discuss reasonable compensation, understand payroll requirements, and review what the decision could affect elsewhere in the financial plan.
Before making the election, bring the people who share the financial picture into the conversation. It may be your spouse, business partner, CPA, financial advisor, or attorney, depending on the decision.
The question isn’t simply whether an S-corp could reduce taxes. It’s whether the structure makes sense for the business you have, the compensation you need to support, and the financial decisions that come after it.
If the timing and economics make sense, move forward intentionally. If they don’t, waiting can be the right decision.
Not sure which side you’re on? Let’s talk.
