An S-Corp election can lower self-employment tax — but only after you clear the compliance costs. Here is a framework advisors use.
The self-employment tax problem
Sole proprietors and single-member LLCs pay 15.3% self-employment tax on net profit up to the Social Security wage base.
How the S-Corp changes it
You pay yourself reasonable W-2 wages and take the rest as distributions. Only the wages are subject to payroll tax.
Rough break-even
For most service businesses, the switch pays off around $60k–$80k of consistent net profit — after accounting for payroll, bookkeeping, and separate returns.
Reasonable compensation
Under-paying yourself is the fastest way to trigger IRS reclassification. Document how your salary compares to industry norms.
Written by Zaki Enterprise Advisors — Licensed Insurance & Tax Professionals.
Reviewed by the same Texas advisors who work with our clients on tax preparation, ACA, Medicare, and property & casualty coverage.