Jennifer Chen, CPA &

Michael Stodulski, CPA – August 10, 2026

The Benefits of S-Corporation Election

As your business grows, finding ways to keep more of what you earn becomes increasingly important. One strategy many business owners consider is electing an S-corporation tax status. While an S-corporation is not the right fit for every business, when used appropriately it can create meaningful tax savings.  In this article, we will walk through what an S-corporation election is, the potential benefits, when it may make sense to make the S-corporation election, and what you need to know before taking the next step.

Do I need to create both an LLC and an S-corporation?  What is the difference between an LLC and an S-corporation?

S-corporations and LLCs are helpful tools for businesses, but they serve different purposes.  An LLC (limited liability company) is a legal business structure that can provide liability protection by separating your personal assets from your business liabilities. An S-corporation is not a type of legal entity; it is a federal tax election that certain businesses can choose for tax purposes.

Many small business owners form an LLC and then elect to have the LLC taxed as an S-corporation. This allows them to maintain the liability protection of the LLC while reducing self-employment taxes through the S-corporation.

When does it make sense to switch my business to an S-corporation?

In general, business owners consider an S-corporation election once the business generates at least $100,000 in annual net income and they believe that earnings will remain at or above that level in the years ahead.  The reason for this is because you must factor in the additional cost of the S-corporation tax return, payroll and usually bookkeeping services as well.  Once business net income exceeds $100,000 the savings on self-employment tax will outweigh these additional costs.

What are the benefits of an S-corporation?

The main benefit of an S-corporation is it allows you to save on self-employment tax. Self-employment tax is made up of social security and Medicare tax: 12.4% (Social Security) + 2.9% (Medicare) = 15.3% total tax rate.  If this sounds familiar, it is because self-employment tax is the exact same thing as payroll taxes, just with a different name.  Before the S-corp election, you effectively pay self-employment tax on the entire business net income. With the S-corp election, you pay yourself a reasonable salary and only pay self-employment tax (aka payroll taxes) on this amount.  Below is a helpful example:

Note: total taxes = self-employment tax (aka payroll tax) + income taxes.

QBI: Qualified Business Income; FUTA: Federal Unemployment Tax Act; NBI: Net Business Income; MFJ: Married Filing Jointly

In this example, we can see that a business with net income of $122,000 (before factoring in owner compensation) can save roughly $3,700 by switching to an S-corporation.

What is a “reasonable salary”?

Though the IRS does not provide quantifiable tests as to what is considered a reasonable salary, we can think of this as the amount you would pay someone else to complete the work you have done. In other words, how much would it cost to hire someone in the same role with the same responsibilities in the marketplace. There are considerable risks and penalties associated with underpaying yourself.  The IRS reserves the right to reclassify distributions as wages.

How do I convert my business to an S-corporation?

The election to be taxed as an S-corporation is due by March 15^th of the year you wish the election to be effective.  For example, businesses wanting to be treated as an S-corporation starting in 2027 need to make the election by March 15^th, 2027.  The election is made on Form 2553.  If you do not file by March 15^th, all hope is not lost.  The IRS does allow certain exceptions for late elections.  

What are my next steps after S-corporation election?

Once the S-corporation election submitted on Form 2553 has been accepted, you will need to address the following:

• Set up payroll and start paying yourself a reasonable salary.
• Ensure an organized and accurate bookkeeping system is implemented so that all business expenses and income are recorded properly.
• Annually file Form 1120-S to report income and taxes

At Array Tax Services we believe taxes shouldn’t be taxing. If you are a self-employed individual exploring how to structure your business, we are here to help you navigate that process. If you have any questions, please contact our team!