“You should be an S corp” is the most common tax advice on the internet, usually right after “drink more water,” and with about as much nuance. It’s also incomplete.
The election can save a profitable owner thousands a year. It can also cost a smaller business more than it saves, and lock the owner into payroll, extra filings and IRS scrutiny they didn’t sign up for.
So let’s walk through where the savings come from, where they leak, and how to tell which side of the line you’re on.
Where the savings come from
As a single-member LLC, every dollar of profit is subject to self-employment tax: 15.3% on most of it, up to the Social Security wage base ($184,500 for 2026), and 2.9% above that.
As an S corporation, you split profit in two:
- A salary paid through payroll. Payroll taxes apply, same rate as before.
- The remaining profit, which passes through to your return. No payroll or self-employment tax applies to it.
That second piece is the whole point. Income tax still applies to all of it.
Where the savings leak
Three things eat into the headline number:
- The qualified business income deduction gets smaller. Most owners get a deduction of up to 20% of business profit. Your S corp salary doesn’t count toward it, so a bigger salary means a smaller deduction and more income tax.
- Running an S corp costs money. A separate business return, payroll processing, payroll tax filings and state unemployment registration. Budget roughly $2,000 to $3,000 a year in added cost.
- Your salary has to be reasonable. You can’t pay yourself $15,000 to save payroll tax on a business that makes $200,000. Well, you can. Once. The IRS looks at what someone in your role would be paid, and low salaries are a known audit focus.
There’s also a quieter cost: lower wages mean lower Social Security earnings, which can mean a smaller benefit later.
The real numbers
We modeled a single owner with no other income, the 2026 federal brackets and standard deduction, and a reasonable salary at each profit level. Federal tax only.
| Business profit | Owner salary | Payroll tax saved | Extra income tax (smaller QBI deduction) | Net federal savings | After ~$2,500 added cost |
|---|---|---|---|---|---|
| $60,000 | $40,000 | $2,358 | $687 | $1,671 | About −$800 |
| $120,000 | $60,000 | $7,775 | $2,616 | $5,160 | About +$2,700 |
| $200,000 | $90,000 | $14,464 | $4,936 | $9,529 | About +$7,000 |
Scroll sideways to see all the columns.
Notice the third column. Roughly a third of the payroll tax savings comes back as income tax, because the salary shrinks the 20% deduction. Most S corp calculators online skip this entirely. We find that a little rude.
At $60,000 of profit, the election loses money. At $120,000, it’s worth doing if the profit is steady. At $200,000, it’s usually clear, assuming the salary holds up.
Your numbers will differ with your industry, your spouse’s income, your state and what reasonable pay looks like for your role. That’s why a modeled answer beats a rule of thumb.
Signs you’re ready
- Profit is steady, not one good year. Payroll runs every month whether business is good or not.
- Your books are clean and current. An S corp runs payroll, files quarterly payroll returns and needs a balance sheet that ties out. Messy books get expensive fast.
- You can document a reasonable salary for your role and market.
- You’ll keep the structure for a few years. Getting out of an S corp can be harder than getting in.
Signs you’re not
- Profit is under roughly $70,000 to $80,000, or swings widely year to year.
- You’re planning to sell, bring in a partner or take on investors soon. S corps limit who can own shares and allow only one class of stock.
- You need every dollar of Social Security credit or you’re still building the business.
Timing
To be taxed as an S corp starting January 1, 2027, file Form 2553 (opens in a new tab) by March 15, 2027. That gives you time to decide with your 2026 numbers in hand, not a guess.
Missed a past deadline? The IRS has a relief procedure for late elections in many cases. It’s worth asking before assuming you’re stuck.
Want your own numbers?
Our Entity & Compensation Analysis models your numbers: sole proprietor versus S corp, a defensible salary range and the full cost of running payroll. You get a written recommendation, including when the answer is “not yet.” We’d rather lose the fee than sell you a structure you don’t need.
If you make the election, MCR Books and MCR Business Tax keep the S corp running cleanly: payroll that ties out, a balance sheet that holds up and no surprises in March.
This post is general information, not tax advice for your situation. Figures modeled October 2026 using 2026 federal rates; your results will differ.