S-Corp Election Strategy

The S-Corp election is one of the most powerful tax strategies for self-employed owners — and one of the most misunderstood. Done correctly, it can save thousands per year in self-employment taxes.

The Core Strategy

As a sole proprietor or single-member LLC, your entire net profit is subject to 15.3% SE tax. On $100,000 profit, that is $15,300.

With S-Corp status, you split profit between a reasonable salary (subject to payroll taxes) and distributions (not subject to SE tax). On a $60,000 salary with $40,000 in distributions, you pay payroll taxes only on $60,000 — saving roughly $6,120 in SE tax on the $40,000 distribution.

The catch: you must pay yourself a reasonable market-rate salary. The IRS aggressively audits S-Corp owners paying below-market salaries to avoid payroll taxes.

When S-Corp Makes Sense

The S-Corp election generally makes financial sense when net self-employment income exceeds $50,000 to $60,000 per year. Below that threshold, compliance costs typically exceed the tax savings.