What Is an S-Corp Election — and When Is It Worth It?
You can keep your LLC and change how the IRS taxes it. Done at the right income level, that switch can cut your self-employment tax. Done too early, it costs more than it saves.
An S-corp isn't a new company — it's a tax election. Your LLC can elect to be taxed as an S-corporation. You then split your money into a reasonable salary (which owes payroll/self-employment tax) and distributions (which generally don't), which can lower the total self-employment tax you pay.
Why the split saves money
As a plain sole proprietor or default LLC, every dollar of profit gets hit with self-employment tax (~15.3%). Under an S-corp election, only the part you pay yourself as a reasonable salary carries that tax. The rest can come out as distributions that skip self-employment tax — that gap is the savings.
The catches most people miss
- "Reasonable salary" is a rule, not a loophole. The IRS requires you to pay yourself a fair wage for the work you do. Set it too low to dodge tax and you're inviting a problem.
- Payroll is now a real cost. You have to run actual payroll, file extra returns, and usually pay a bookkeeper or CPA. Those costs eat into the savings.
- It only pays off above a certain profit. Below that, the added cost and hassle outweigh the tax you'd save — which is exactly why timing matters.
The rough shape of the math
The election tends to make sense once your net profit is consistently high enough that the self-employment tax you save on distributions clearly beats the cost of payroll and filings. That crossover isn't a single magic number — it depends on your profit, your reasonable salary, and your state. This is a spot to run real numbers with a CPA rather than guess.
This is general education, not tax or legal advice — Done Deal Digital is not a CPA firm or a law firm. Business structure and tax choices depend on your income, your state, and your goals. For your situation, work it out with a qualified CPA or attorney.
That's the short version
Are you past the S-corp crossover point?
The full e-book gives you the income ladder and the plain-English math to see whether the S-corp election would actually save you money at your profit level — plus how to set a reasonable salary you can defend.
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