Should You Be an S Corp? The Entity Choice That Saves Entrepreneurs Thousands

Julius Vincent
Mar 3
2 min read

Updated: Jun 16

If you’re a high-income entrepreneur or small business owner, the way your business is structured could be costing you tens of thousands in unnecessary taxes. One of the most powerful tools for improving tax efficiency? The S Corporation.

Let’s break down how it works, who it’s right for, and how to avoid the most common mistakes when making the switch.

What Is an S Corporation?

An S Corporation (or S Corp) isn’t a legal entity—it’s a tax election. LLCs and corporations can elect to be taxed as an S Corp by filing IRS Form 2553. This allows profits and losses to “pass through” to your personal tax return—similar to an LLC—but with one key advantage: self-employment tax savings.

Here’s the difference: as an S Corp owner, you pay yourself a reasonable salary and take the remaining profits as distributions—which are not subject to self-employment tax.

How It Works

Let’s say your business earns $200,000 in net profit.

As a sole proprietor or single-member LLC, you’d pay self-employment tax (15.3%) on the full $200,000.
As an S Corp, you might pay yourself a $100,000 salary (subject to payroll tax), and take the remaining $100,000 as a distribution—saving over $15,000 in self-employment tax alone.

This split is what makes the S Corp election so powerful.

What Counts as a Reasonable Salary?

The IRS requires that you pay yourself a salary that reflects the value of your work. You can’t underpay just to boost your distributions.

The IRS considers:

Your role and responsibilities
Industry standards
Hours worked
Business revenue
Comparable wages for similar positions

If you underpay yourself, the IRS can reclassify distributions as wages—leading to back taxes, penalties, and interest.

Compliance and Ongoing Requirements

S Corps come with more complexity than standard LLCs. You’ll need to:

Run payroll and issue W-2s
File quarterly payroll tax returns
File an annual S Corp tax return (Form 1120-S)
Maintain corporate formalities (meeting minutes, separate bank accounts, etc.)

It’s not a heavy burden—but it does require attention to detail and the right support.

Practical Example

Brian, a solo consultant, was earning $180,000 per year and paying self-employment tax on the full amount. After electing S Corp status and working with a tax advisor to set a fair $90,000 salary, he took the remaining $90,000 as a distribution.

Result: He saved approximately $13,770 in self-employment taxes—and gained access to a larger Solo 401(k) deduction by being on payroll. The added administrative costs were minimal compared to the annual savings.

Is an S Corp Right for You?

Consider electing S Corp status if:

Your business nets over $75,000 annually
You’re ready to run payroll or hire a payroll service
You want to reduce your self-employment tax burden
You’re working with a tax advisor who understands the rules

If you’re just starting out, have minimal profits, or plan to reinvest heavily, it may be worth waiting until your business is more established.

Final Thoughts

The S Corp election can be a powerful way to legally lower your tax bill, but it requires the right setup and ongoing support. Done correctly, the savings can be substantial—and permanent.