The S Corp election is the most over-recommended and under-explained move in small-business tax. The pitch goes: "Become an S Corp and stop paying self-employment tax on your profits." That's true. What gets left out is everything else.
What an S Corp actually changes
An S Corp election doesn't change what kind of business you run. It changes how the IRS taxes your profits. As a sole proprietor, every dollar of profit gets hit with 15.3% self-employment tax. As an S Corp, you split your profit into a reasonable salary (which still owes payroll tax) and distributions (which don't).
The break-even threshold
For most service businesses, an S Corp starts saving real money once your net profit is roughly $80K–$100K above the salary you'd reasonably pay yourself. Below that, the savings get eaten by extra costs: payroll service, a separate tax return, bookkeeping that has to be actually correct rather than approximately correct.
- Net profit $60K → S Corp is usually a wash or net negative
- Net profit $120K → S Corp starts saving $3–6K per year
- Net profit $250K+ → S Corp typically saves $12–20K per year
- Net profit $500K+ → S Corp savings flatten as the Social Security wage base caps out
If a TikTok CPA tells you to make the S Corp election without asking what your net profit is, what state you live in, and how much you'd pay yourself — close the app.
The "reasonable salary" trap
The whole strategy hinges on paying yourself a reasonable salary. Set it too low and you invite an IRS audit; the IRS will reclassify your distributions as wages and you'll owe payroll tax plus penalties. Set it too high and you've given back the savings.
We use comp surveys for your specific industry and role to get the number right — and document why we picked it. That documentation is your audit defense.