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For a profitable owner, the right entity can save thousands a year. A wrong setup, or a good one run badly, can draw IRS attention.
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An S corp election can lower self-employment tax for profitable owners if the salary, payroll and books are set up correctly. We help you decide whether an S corp, LLC, partnership or C corp fits, set a reasonable salary you can support with documentation, and adjust the setup as your profits change.
An LLC is a legal entity created under state law. An S corporation is a tax election that an LLC or a corporation can make. So the useful question is usually how your profit should be taxed.
| LLC (default tax treatment) | S corporation | C corporation | |
|---|---|---|---|
| How profit is taxed | Passes through to your personal return | Passes through to your personal return | Taxed at the corporate rate (21%), then again when paid out as dividends |
| Self-employment tax | Generally on all of an active owner's profit | Payroll taxes on your salary; remaining profit not subject to self-employment tax | Payroll taxes on salary only |
| Owner salary required? | No | Yes, a reasonable salary if you work in the business | Yes, if you work in the business |
| QBI deduction | May qualify | May qualify | No |
| Best fit (generally) | Early-stage or lower-profit businesses | Consistently profitable owners who work in the business | Reinvesting most profit, raising capital, or planning a stock sale |
It's a break-even calculation. The self-employment tax you save on profit above your salary has to be more than the extra costs: payroll, a separate business return (Form 1120-S) and state fees. In California, for example, S corporations pay a 1.5% franchise tax with an $800 minimum. Your salary, your state and your QBI deduction all affect the result. We work through real numbers in at what profit does an S corp make sense?
If you work in your S corp, the IRS expects you to pay yourself a reasonable salary before you take distributions. The IRS has no approved ratio, and the popular "60/40 rule" isn't in the tax code. We set your salary based on your role, hours, responsibilities and market pay, write down how we got there, and review it as profits change. A salary that's too low invites IRS scrutiny. One that's too high costs extra payroll tax and can reduce your QBI deduction.
Read more: S corp reasonable compensation · salary and the QBI sweet spot · extra profit? salary first.
Which entity fits your profit, plans and state, with the numbers to back the recommendation.
Filing Form 2553 on time, or requesting late-election relief if a deadline was missed.
A documented salary analysis, and help coordinating payroll setup.
Accountable plans for home office and mileage, and health insurance for owners handled correctly.
Holding companies, partnerships and QBI aggregation for owners of more than one business.
Pass-through entity tax elections and state filing strategy.
The 20% deduction for pass-through owners no longer ends after 2025, which changes the S corp math.
The individual SALT cap is $40,000 for 2025 and phases down at higher incomes. Entity-level PTET elections are still available.
The Section 1202 (QSBS) gain exclusion was expanded for qualifying C corporation stock issued after July 4, 2025. That matters if you're considering a C corp ahead of a future sale.
Firm figures as reported by My CPA Pro.
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There isn't one number. It depends on a reasonable salary for your role, your state's fees and your QBI deduction. We run the break-even with your numbers. See the S corp profit threshold.
An LLC is a legal entity, and an S corp is a tax election. An LLC can elect to be taxed as an S corp. The LLC provides the legal protection, and the election determines how the profit is taxed.
A reasonable salary for the work you do, based on your role, hours and market pay. There's no fixed percentage. We document the analysis in case the IRS asks.
No. It's a rule of thumb, and the IRS doesn't use it. The IRS looks at what you do and what similar work pays.
Form 2553 is generally due within two months and 15 days after the start of the tax year the election should take effect. If you missed it, the IRS offers late-election relief in many cases.
Payroll costs, a separate business return (Form 1120-S) and state fees. California, for example, charges a 1.5% franchise tax with an $800 minimum. We include these costs in the break-even.
Sometimes. It usually comes up when you're reinvesting most of your profit, raising outside capital, or planning a stock sale that may qualify for the QSBS exclusion. Owner-operators who take their profit out usually do better with a pass-through.
Often, yes, but your salary affects both. A higher salary saves less self-employment tax and can reduce QBI, while a lower one invites scrutiny. Setting the salary is part of the plan.
Bring your last return and your profit numbers, and we'll tell you what we see.
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This page is general information, not tax, legal or financial advice for your situation. Tax rules change and depend on your facts, so talk with a qualified professional before acting.
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