S-Corp election can save self-employment tax — but it adds payroll, filings, and complexity. The break-even is more nuanced than the internet suggests.
The mechanic everyone quotes
Default LLCs pay 15.3% SE tax on all net profit. An S-Corp pays payroll tax only on 'reasonable salary' and the remainder flows out as a distribution free of SE tax.
On $120k of profit, splitting $70k salary / $50k distribution roughly saves $7,500 in payroll tax versus the default LLC treatment.
The costs nobody quotes
Payroll setup, quarterly 941s, W-2/W-3, state unemployment registrations, an annual Form 1120-S, and a separate K-1 to yourself. Realistic added cost: $1,500–$3,500/year.
If your net profit is under ~$60k, the break-even rarely pencils out.
Reasonable salary is not optional
The IRS expects S-Corp owner-employees to take a salary that reflects what an arm's-length employer would pay for the work. Set it too low and you invite audit.
Document the basis with comparable wage data and re-evaluate yearly.