If you're a US sole proprietor or single-member LLC and your net business income is climbing past ~$60,000/year, you may save real money in self-employment tax by electing S-Corp status. Here's how the math works — and the catch.
The math, simplified
As a sole prop or single-member LLC, every dollar of net profit up to the Social Security wage base ({{SS_WAGE_BASE}} in {{SS_WAGE_BASE_YEAR}}) is hit with 15.3% self-employment tax (Social Security 12.4% + Medicare 2.9%). Income above the wage base only owes the 2.9% Medicare portion — the SS portion caps out.
With an S-Corp election, you split your business income into two parts:
- Reasonable salary — paid to you as W-2 wages, subject to SE-tax-equivalent payroll taxes
- Distributions — what's left after salary, paid to you as owner draws, not subject to SE tax
The savings come from the distribution portion. A common rule of thumb: assume a 60% salary / 40% distributions split. On $100K net, that's $40K in distributions × 15.3% SE rate saved ≈ $6,000/year in tax savings.
ExpenseBot's Year-End Tax Workbook flags this when your net income crosses the $60K threshold.
What the savings actually look like (60/40 split)
| Net income | Salary (60%) | Distributions (40%) | SE tax saved | Compliance cost | Net savings |
|---|---|---|---|---|---|
| $80,000 | $48,000 | $32,000 | $4,896 | -$2,000 | ~$2,900 |
| $120,000 | $72,000 | $48,000 | $7,344 | -$2,000 | ~$5,300 |
| $180,000 | $108,000 | $72,000 | $10,532 | -$2,000 | ~$8,500 ← peak |
| $250,000 | $150,000 | $100,000 | $6,136 | -$2,500 | ~$3,600 |
| $350,000 | $210,000 | $140,000 | $4,060 | -$2,500 | ~$1,600 |
Why the plateau: the {{SS_WAGE_BASE_YEAR}} Social Security wage base is {{SS_WAGE_BASE}}. Sole props pay SS tax (12.4%) only on income up to that cap — and only the 2.9% Medicare portion on income above. Past the cap, both sole prop and S-Corp pay similar amounts on the same dollars. So the distribution-side savings shrink to just the 2.9% Medicare portion above the cap.
Savings formula: (min(net, cap) − min(salary, cap)) × 12.4% + distributions × 2.9%
Sweet spot for professional services on 60/40: roughly $120K–$200K net, with the peak near $180K. Below $120K, compliance eats savings. Above $200K, the SS wage cap starts kneecapping savings.
Above the sweet spot you can technically re-open savings by dropping the salary ratio (50/50, 40/60), but the IRS scrutinizes that hard for owner-employees — see the "reasonable salary" section below.
When it's a good idea
- Net business income reliably $60K+ (some CPAs prefer $80K+ to absorb compliance cost)
- Your work could defensibly justify a $40-50K W-2 salary (consultants, developers, designers, marketers — most professional services)
- You can commit to running payroll (or paying ~$1,500-$2,500/yr for a payroll service)
- You want to stay in the same business 3+ years (S-Corp election is generally hard to revoke)
When it's NOT a good idea
- Net income below ~$60K — the added compliance cost eats the savings
- You can't justify paying yourself a reasonable salary (the IRS scrutinizes this)
- You expect your income to drop back below $60K next year
- You're a content creator, podcaster, streamer, or other entertainer — see the creator-specific guide because IRS scrutiny is higher for entertainers (your face is the product, so the "reasonable salary" defense is different).
The catch: "reasonable salary" enforcement
The IRS knows the S-Corp election is a tax-savings move. To prevent abuse, they require S-Corp owner-employees to pay themselves a "reasonable salary" for the work they do — comparable to what a non-owner would earn in the same role.
Pay yourself $10K and take $90K in distributions on $100K revenue? The IRS will reclassify the "salary" as too low, hit you with back payroll taxes plus penalties. The 60/40 split is a rough heuristic that works for most professional services.
The deadline
To elect S-Corp status for the current tax year, you must file Form 2553 by March 15 of that year (unless you got a late-election grace under Rev. Proc. 2013-30).
Miss the deadline and you wait another year to start saving.
What to do next
- Talk to your accountant. This is an entity-level decision with state-tax implications, multi-year commitments, and ongoing payroll compliance. Don't DIY it from a blog post.
- Run the numbers in your specific state. Some states (California, Tennessee, others) have entity-level S-Corp taxes that compress the federal savings.
- Plan the payroll setup. You'll need a payroll service (Gusto, ADP, OnPay, etc.) or a bookkeeper.
- File Form 2553 by March 15 of the year you want the election to take effect.
ExpenseBot doesn't file Form 2553 for you — but it does keep clean records of your net business income, which is the number your accountant needs to make the recommendation.