Most founders form an LLC first and think about S-Corp later. That's usually right — but "later" isn't a fixed date. It's a math problem.
The rule of thumb: $80k net profit
Below $80k net profit, the payroll setup, quarterly filings, and W-2 tax overhead usually eat the savings. Above $80k, the 15.3% self-employment tax on the distributions above your reasonable salary starts saving you real money.
Reasonable salary is the whole game
The IRS requires S-Corp shareholders to pay themselves a "reasonable salary" before taking distributions. If you set it too low, you'll invite an audit — and losing an audit means back taxes + penalties + interest.
Industry benchmarks:
The break-even math
At $80k profit, an LLC pays ~$12,240 in SE tax. An S-Corp with a $40k salary pays ~$6,120 in FICA on the salary and $0 on the $40k distribution. Savings: $6,120 — before you account for the $1,500-$2,500/year payroll + tax prep overhead.
Above $150k profit, the savings get big fast. At $200k profit with a $80k salary, you save about $18k/year.
When NOT to elect S-Corp
How AG FinTax helps
We run the numbers on your specific situation. Wizard Step 5 has a live S-Corp savings calculator — plug in your profit estimate and see the answer.