S Corporation Election: What It Is, How It Works, and Why It Might Be Your Next Smart Money Move
We have officially made it through tax season (and ya girl is celebrating!!) but if you looked at your taxes and said, “HOLY COW I made so much money, and that meant I paid so much taxes” then today’s article is for you.
In my world there are 2 “tax seasons”:
Tax Prep Season - January to April when we fill out tax forms
Tax PLANNING Season - The rest of the year, to plan what taxes will look like and how to strategically minimize them.
So now that we have finished #1, we are moving onto #2 and starting to plan how to NOT feel the same way in 2026 - and for a lot of entrepreneurs that starts with the proper entity structure.
So today we’re diving into one of my favorite tax-saving strategies: the S Corporation election.
What Exactly Is an S Corporation Election?
First thing’s first – an S Corporation isn't actually a type of business entity you form at the state level. An S Corp is actually a tax election you make with the IRS for your existing entity.
When you make this election, your business remains the same legal entity it was before (typically an LLC), but the way you're taxed completely changes.
I mean, could they make it any more confusing….?
Why Would You Want an S Corporation Election?
Let me cut to the chase – it's all about those self-employment taxes!
As a regular LLC owner, every dollar of profit your business makes gets hit with:
Regular income tax (based on your tax bracket)
Self-employment tax (a hefty 15.3% that covers Social Security and Medicare)
But with an S Corporation election, you can pay yourself a reasonable salary (which still gets hit with all those taxes, just now through payroll) AND take additional profit distributions that are NOT subject to that 15.3% self-employment tax.
Let's put some numbers to this:
Without S Corp:
Business profit: $100,000
Self-employment tax: $15,300 (ouch!)
With S Corp:
Reasonable salary: $60,000 (subject to ~$9,180 in Social Security/Medicare taxes)
Distribution: $40,000 (NO self-employment tax!)
Total Payroll tax: $9,180 (half from paycheck, half paid by company)
Tax Savings: $6,120 per year!
How to Make the S Corporation Election
Ready to save some money? Here's how to make it happen:
Complete Form 2553 (Election by a Small Business Corporation)
Have all shareholders sign it (if it's just you, that's easy!)
Submit it to the IRS by the deadline (generally the 15th day of the 3rd month of your tax year for it to be effective that year)
Pro tip: If you've missed the deadline, there are some relief provisions for late elections. Don't let that stop you from exploring this option!
But Wait! There's More to Consider...
An S Corporation election isn't just about filing a form and watching the savings roll in. There are additional responsibilities that come with it:
1. Pay Yourself a Reasonable Salary
The IRS isn't naïve. They know what you're up to with this tax-saving strategy, which is why they require S Corp owners to pay themselves a "reasonable salary" before taking any distributions.
What's reasonable? It should be comparable to what someone in your position, with your experience, in your industry, in your geographic area would earn. In other words, you can't pay yourself $20,000 and take $180,000 in distributions if you're a lawyer who would normally make a $150,000 salary.
2. Run Actual Payroll
Yes, you'll need to set up payroll, withhold taxes, and file the appropriate payroll tax returns (or hire someone like us to handle it for you!). I highly recommend GUSTO for this – it makes payroll a breeze.
3. Create an Accountable Plan
Want to deduct those home office expenses and business mileage without taking them as self-employment deductions? An accountable plan is your answer!
This is a formal arrangement that allows your S Corp to reimburse you for business expenses you incur personally. These reimbursements are:
Not taxable income to you
Deductible by your S Corp
Not subject to payroll taxes
It's a win-win-win! But you need to document it properly and follow specific rules.
Let's Talk About Those TikTok "Tax Gurus"...
We need to have a little chat about all those financial "gurus" telling you to rush into an S Corporation election the second you make your first dollar. 🙄
Look, TikTok and Instagram aren't exactly giving you the whole story here. Those 60-second videos conveniently leave out the compliance costs, administrative headaches, and the fact that this strategy isn't one-size-fits-all!
Sure, they love to shout about saving thousands in self-employment taxes (and they're not wrong about the potential), but they mysteriously forget to mention the additional expenses you'll incur:
Payroll processing fees
Higher tax preparation costs (S Corp returns are more complex)
Bookkeeping that suddenly needs to be much more precise
State filing fees that can add up fast
Is an S Corp Actually Right for You?
The S Corporation election tends to make financial sense when your business is generating at least $60,000-$80,000 in profit annually. Below that threshold, the additional costs of compliance (payroll expenses, bookkeeping, tax preparation, etc.) typically outweigh the SE tax savings.
Some questions to ask yourself:
Am I making enough profit for the savings to be worthwhile?
Am I okay with the additional administrative requirements?
Do I have a good accountant who understands S Corps? (hint hint 😉)
Common Mistakes to Avoid
Not paying yourself a reasonable salary - This is the easiest thing the IRS can quickly identify on your return.
Missing filing deadlines - Both for the initial election and for ongoing tax returns (The 1120S is due a month sooner than your 1040!)
Taking distributions when the business doesn't have profit - This can create unexpected tax consequences.
Not understanding basis limitations - S Corp owners can only take tax-free distributions up to their stock basis (aka, you can’t take out a loan and then distribute all of that to yourself without paying excess tax)
Forgetting about state-level elections - Some states don't automatically recognize federal S Corp status or don’t recognize it at all (Hi, Tennessee).
Ready to Take the Next Step?
If you're thinking an S Corp might be right for your business, don't go it alone! This is exactly the kind of strategic decision where professional guidance is invaluable.
Want to schedule a consultation to talk about if this might be right for you? - https://www.christybowie.com/hourly-call-booking
And remember – at CBFS, we believe you can make ANY decision as long as it's an informed one. Now you're informed about S Corps! 💸
Book your call today!
Let’s chat about your options. Click below to schedule your consultation call now.
More Financial Resources:
Estimated Tax Payments For Small Business: How To Calculate Your Quarterly Payments
Why Reading Your Tax Return (& Not Just Signing It) Is Crucial For Small Business Owners
Disclaimer: While this guide provides valuable insights, it's important to note that every business has unique circumstances. For personalized advice tailored to your specific situation, please consult with a qualified tax professional. Our goal at CBFS is to empower you to make informed decisions that support your business growth and personal wealth-building objectives.
Disclaimer: Some of the links in this post may contain affiliate links that will provide compensation.
Disclaimer: AI may have been used to help create, enhance, or review this content. All relevant financial information has been reviewed by a licensed financial professional.
