If your business is profitable and growing, you have probably heard that an S corp election can cut your taxes. It can, but not for everyone, and the savings come with extra paperwork and costs.
This post is for owners of single-member LLCs, sole proprietorships and partnerships who are wondering whether to make the switch. The short answer: an S corp election usually starts to pay off once your business clears roughly $100,000 a year in profit, and the case gets stronger as profit grows. Below, I walk through why, with real 2026 numbers.
What an S corp election actually changes
An S corp election changes how your business is taxed, not how it is organized. Your LLC stays an LLC. It just files with the IRS as an S corporation.
Right now, as a sole proprietor or single-member LLC, all of your profit is subject to self-employment tax: 12.4% for Social Security and 2.9% for Medicare, 15.3% in total, on 92.35% of your net earnings. That is on top of income tax.
As an S corp, you split your profit into two pieces:
- A salary you pay yourself through payroll. Social Security and Medicare taxes still apply to this part.
- Distributions of the remaining profit. These are not subject to Social Security or Medicare tax.
Income tax works about the same either way. The profit still passes through to your personal return. The savings come from the payroll taxes you no longer pay on the distribution portion.
A real example: $100,000 of profit
Say your consulting business nets $100,000 in 2026 and you pay yourself a $50,000 salary as an S corp.
| Sole proprietor / LLC | S corp | |
|---|---|---|
| Profit | $100,000 | $100,000 |
| Amount subject to Social Security and Medicare | $92,350 | $50,000 (salary only) |
| Social Security and Medicare tax | about $14,130 | about $7,650 |
| Payroll tax savings | about $6,480 |
That $6,480 is before the extra costs of running an S corp, which typically run a few thousand dollars a year (more on those below). It also ignores smaller income tax effects that vary by person. The point: at this profit level, most owners come out well ahead.
At $40,000 of profit, the picture changes. The savings shrink, while the costs of payroll and an extra tax return stay about the same. That is why the election is not a fit for everyone.
The costs and catches
You must pay yourself a reasonable salary. The IRS requires S corps to pay owners who work in the business reasonable compensation before taking distributions. It looks at your duties, experience, time spent and what similar businesses pay. Setting your salary too low to save tax is the most common way S corp owners get in trouble.
You have to run payroll. That means withholding, quarterly payroll returns, W-2s, and federal and state unemployment taxes. Most owners use a payroll service.
You file an extra tax return. An S corp files its own return (Form 1120-S) each year, in addition to your personal return. Expect higher tax preparation fees.
It can shrink another deduction. The salary you pay yourself does not count toward the 20% qualified business income deduction, so that deduction may get smaller.
Michigan considerations. Michigan does not charge its corporate income tax on S corps; the profit is taxed on your personal return. S corps can also elect into Michigan’s optional flow-through entity tax, which can help some owners get around the federal cap on state and local tax deductions. Whether that helps you depends on your income.
When an S corp election makes sense, and when it doesn’t
An S corp election is often worth a look if:
- Your business consistently nets $100,000 or more a year
- You actively work in the business and can justify a salary well below your total profit
- You are comfortable running payroll, or paying a service to do it
It is usually not a fit if:
- Your profit is low or swings a lot from year to year
- You expect losses in the next year or two
- The business mainly holds real estate, which is generally better kept outside an S corp
- You plan to bring in investors who need different ownership terms; S corps allow only one class of stock and limit who can own shares
These are starting points, not rules. Your salary level, other income and state taxes all change the math.
How and when to make the S corp election
You elect S corp status by filing IRS Form 2553. To take effect for a given year, the form must be filed no more than 2 months and 15 days after that tax year begins, or at any time during the year before. For most businesses on a calendar year, that means by March 15 to be an S corp for the whole year.
Missed the deadline? The IRS offers relief for late elections in many cases, as long as you had reasonable cause and file within 3 years and 75 days of the date you want the election to take effect. Outside those rules, you may need to request a private letter ruling, which carries a fee.
Before you file, set up payroll and decide on a salary you can support. The election is easy to make; running the business correctly afterward is where the work is.
Get a second set of eyes before you elect
The right answer depends on your profit, your salary, your other income and where you live. A tax accountant can run the numbers for your business in under an hour and tell you whether the savings are worth it.
If you have been searching for a “CPA near me” or an “accountant near me” in Metro Detroit, I am Joshua Cohen, a licensed CPA based in Huntington Woods. I help small business owners decide whether an S corp makes sense, set it up correctly, and handle the business tax returns that follow. I meet in person in the Royal Oak, Berkley and Ferndale area and work with clients remotely nationwide.
Your first consultation is free. Fill out the contact form and I will reach out to set up a time.
This post is general information, not tax advice for your specific situation.
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