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 roughly $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. Set it too low and you invite an audit — and losing an audit means back taxes plus penalties plus interest.
Industry benchmarks to stay safe:
- Software consultants: 40–50% of net profit
- Freelance designers: 45–55%
- Real estate agents: 30–40% (commission-based)
- Doctors / dentists: 60–70% (specialist salaries are high)
The break-even math
At $80k profit, an LLC pays roughly $12,240 in self-employment tax (15.3% on 92.35% of profit).
An S-Corp with a $40k salary pays roughly $6,120 in FICA on the salary and $0 on the $40k distribution.
That's ~$6,120 saved — before you account for the $1,500–$2,500/year payroll + tax-prep overhead. The savings window opens once profit is comfortably above $80k and only widens from there.
| Net profit | LLC SE tax (approx) | S-Corp FICA + overhead | Net S-Corp savings |
|---|---|---|---|
| $60k | $8,470 | Payroll overhead eats it | Slightly negative |
| $80k | $11,300 | ~$6,120 FICA + $2k overhead | ~$3k |
| $120k | $16,950 | ~$6,120 FICA + $2k overhead | ~$8k |
| $200k | $28,240 | ~$6,120 FICA + $2k overhead | ~$20k |
Eligibility is the hard gate
Before the math matters, check eligibility:
- Max 100 shareholders.
- One class of stock.
- Shareholders must be US citizens or green card holders. H-1B, L-1, EAD, and ITIN holders cannot be S-Corp shareholders — this rule alone eliminates the S-Corp for a large share of immigrant founders.
If you don't qualify, the LLC math above is moot — skip the S-Corp and optimize the LLC instead.
The timeline to elect
- Form the LLC.
- When profit is consistently above ~$80k, file Form 2553 (by March 15 for the current tax year).
- Set up payroll and start paying your reasonable W-2 salary.
- File Form 1120-S annually.
- Take the rest as distributions — no SE tax.
When an LLC is still the answer
An S-Corp is not a goal — it's a tax tool. Stay an LLC when:
- You're below ~$80k net profit.
- You're on a visa/ITIN status (ineligible).
- You plan to raise outside investment (S-Corp restricts shareholders).
- You hate payroll admin and the savings don't justify it.
Common questions
Is an S-Corp an entity? No — it's a tax election on top of an LLC or C-Corp. You don't "form an S-Corp"; you form an LLC and elect S-Corp status.
Can I switch back? Yes, by revoking the election, but the IRS imposes waiting periods. Pick the timing carefully.
Who runs payroll for a one-person S-Corp? You can use a payroll service (about $30–$100/month) — many founders choose one that includes the W-2 filings.
Does S-Corp help with a 401(k)? Somewhat — you can set up a solo 401(k) either way. The S-Corp mainly changes how your compensation is split between wages and distributions.
Run the numbers with a CPA
The S-Corp decision is a state-and-industry-specific math problem. A 30-minute CPA call with us will tell you the exact year you should elect — and when to hold off.