S Corp Tax Savings: Why Six Figures Is a Rumor, Not a Rule

Someone told you that once you cross six figures, an S corp will save you $10,000 in taxes. I have heard some version of that for 30 years, from friends, from chamber of commerce breakfasts, and from videos on TikTok. The headline number is real. It is also incomplete. S corp tax savings look very different once the fine print sits on the same page, and for plenty of business owners the real number is half of what they were promised, or close to nothing.

Where the $10,000 figure comes from

An S corp splits your income into two buckets. One is salary, which carries payroll taxes. The other is distributions, which carry no self-employment tax. Federal and state income tax still apply to everything. That carve-out of Social Security and Medicare tax is the whole appeal.

Picture a small design and marketing firm with an owner and two employees, set up as a single-member LLC and taxed as a sole proprietor. The owner is married, files jointly, and shows $150,000 in profit. Federal self-employment tax plus income tax on that profit comes to about $31,000. Now pay yourself an $80,000 salary and take the other $70,000 as a distribution. Multiply $70,000 by 15.3% and you get about $10,700. That is the number in nearly every blog post, and it is not wrong. I have used it in my own practice. It just is not the complete answer.

What shrinks the savings

Start with the salary itself. You still pay 15.3% on that $80,000, which is about $12,200. As a sole proprietor your self-employment tax was around $21,200, so the payroll tax savings is closer to $9,000 than $10,000.

Next comes the qualified business income deduction, or QBI, which lets you deduct up to 20% of your business income. As a sole proprietor it applies to the whole profit. As an S corp owner, your salary does not count, so the deduction gets smaller and your taxable income goes up. In this example that adds roughly $1,300 in income tax. The same salary that saves payroll tax takes a bite out of QBI, and almost nobody shows both on one page.

Then there is the cost of running the thing. An S corp needs payroll every pay period, a payroll service, unemployment filings, state franchise taxes, and a separate corporate tax return due March 15, a month before most people expect it. That runs about $2,500 a year, depending on who does the work.

Put it together. About $9,000 saved, less $1,300 in added income tax, less $2,500 in costs, and you keep about $5,100. That is still worth doing for this owner. It is also half of the headline.

Is an S corp worth it at $80,000 in profit?

Run the same math for an owner with $80,000 in profit and a $50,000 salary, and the real savings land around $800 a year. Now add payroll every week or two, a corporate tax return, and the risk of the IRS questioning your salary. Raise the salary a little or pay more for a preparer who understands S corps, and that $800 disappears. Plenty of preparers tell owners to elect once profit clears $10,000 or $15,000. At $800 a year, that is not a tax strategy. It is a part-time job.

Why the IRS decides your salary

The salary is not entirely your choice. When S corps first came out, my dad, who is also an accountant, was excited about them, and plenty of owners paid themselves tiny salaries, sometimes $1,000 a month. Imagine a $20,000 salary and $130,000 in distributions on that $150,000 of income. The IRS stepped in with the idea of reasonable compensation. If the money comes from your work, it is wages.

In an audit, the IRS can reclassify what you took out as wages, charge the 15.3% back on every distribution, and add penalties and interest. A lower salary also means you pay less into Social Security, which means smaller benefits later. Greg Crabtree, author of Simple Numbers, Straight Talk, Big Profits, makes a similar point from the business side: pay the owner a market wage first, or your numbers lie to you.

The deadline most people miss

To be an S corp for 2027, you file Form 2553 by March 15, 2027, and you can file it now. The real deadline comes earlier. You need a reasonable salary running through payroll from the start of the year, and payroll systems take a couple of weeks to set up. That makes December 31 the decision date. A late election exists, but you do not want to plan around it.

Run the side-by-side before December 31

Pull last year's tax return and find your Schedule C profit and the self-employment tax on page two of your 1040. Write down a fair salary, meaning what you would pay someone to replace you. Add up what an S corp would really cost you, including payroll, tax prep, and state fees. In Delaware, for example, the franchise tax is $225, and with a registered agent fee (mine is $150) that is $375 a year just to check the box. Then ask your preparer for a sole proprietor versus S corp comparison with QBI and costs included. If they cannot produce one, call me.

I put the math on a one-page sheet you can download free at contentcreatorsaccountant.com/scorps. If you want your real numbers run, the Year-End Business Review is $199, and you can book it at contentcreatorsaccountant.com/review. Six figures is a rumor, not a rule. The math is the rule.