An S-corp election saves money by letting you split your income into a reasonable salary (which pays the 15.3% self-employment tax) and distributions (which don't). The savings only outrun the added cost once your profit is high enough — for most one-owner businesses that's somewhere around $40,000–$60,000 of net profit.
How the S-corp tax savings actually work
As a sole proprietor or single-member LLC, every dollar of net profit is hit with 15.3% self-employment tax on top of income tax. An S-corp lets you pay yourself a 'reasonable salary' (subject to that 15.3% payroll tax) and take the rest as distributions, which skip the payroll tax. The savings equal roughly 15.3% of the amount you take as distributions instead of salary.
The break-even point
An S-corp isn't free: you'll run payroll, file a separate 1120-S return, and usually pay for extra bookkeeping and tax prep — often $1,500–$3,000+ a year. Below about $40,000 of net profit, those costs usually eat the savings. Once profit clears roughly $60,000, the payroll-tax savings on your distributions typically pull well ahead.
What counts as a 'reasonable salary'
The IRS requires your salary to reflect what you'd pay someone else to do your job — you can't pay yourself $10,000 and take $150,000 as distributions. A defensible split is often 40–60% of profit as salary, adjusted for your role and industry. Too low invites an audit; too high wastes the benefit.
Run your own numbers
The right answer depends on your exact profit, state, and salary split. Plug your net profit into the calculator and it estimates the self-employment-tax savings of an S-corp election versus staying an LLC — so you can see if you're past the break-even point before you pay for the setup.
Open the free LLC vs. S-Corp Calculator →
Frequently asked questions
At what income should I switch to an S-corp?
There's no hard line, but many one-owner businesses come out ahead once net profit is consistently above about $40,000–$60,000. Below that, the payroll, filing, and bookkeeping costs usually cancel the savings.
Do I still need an LLC if I elect S-corp?
An S-corp is a tax election, not an entity. Most small owners form an LLC and then elect to have it taxed as an S-corp — you keep the LLC's liability protection and gain the tax treatment.
What's the catch with an S-corp?
More admin: real payroll with withholdings, a separate business tax return, and a defensible 'reasonable salary.' Pay yourself too little salary and you risk an IRS reclassification and penalties.