Sooner or later somebody tells you to “go S corp” to save on taxes. Sometimes that is good advice. Often it is not, because the saving rests on two numbers the pitch usually skips: how much profit the business makes, and what salary you would have to pay yourself for the work you do. This article works through both, using the IRS’s own words for each. If you have not yet settled on an LLC in the first place, start with LLC, Sole Proprietor or Corporation: Choosing a Structure.
What the election changes
An LLC is something your state creates. An S corporation is a federal tax status. The IRS describes S corporations as corporations that “elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” An LLC makes the election on Form 2553. The form’s instructions say an eligible entity that files it on time is treated as a corporation from the election’s effective date and does not need to file a separate Form 8832.
To qualify, the business must pass the tests in those instructions: it is domestic, it has no more than 100 shareholders, its shareholders are individuals (no nonresident aliens), estates, certain trusts or certain exempt organizations, it has only one class of stock, and it is not one of the ineligible kinds, such as certain banks and insurance companies. The IRS adds that the election must be signed by all the shareholders.
Where the saving comes from
As a sole proprietor, or a one-owner LLC taxed as one, your whole profit carries self-employment tax. The 2026 worksheet in Form 1040-ES spells out the math: take 92.35% of net profit, multiply by 2.9% for Medicare, and add 12.4% for Social Security on up to $184,500.
In an S corporation you become an employee of your own company. IRS fact sheet FS-2008-25 says corporate officers “are specifically included within the definition of employee” for Social Security and Medicare (FICA), federal unemployment tax (FUTA) and income tax withholding. Your salary carries Social Security at 6.2% and Medicare at 1.45%, each paid once by you and once by the company (Publication 15, 2026), the same 15.3% combined. The profit left after salary comes to you as distributions, which the IRS calls “non-wage distributions (which are not subject to employment taxes).” That gap is the whole saving. Payroll tax applies to the salary, and none applies to the distributions.
The catch: a reasonable salary comes first
The IRS is direct about the order: “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made.” The same page says the IRS has the authority to reclassify distributions as wages, which brings the payroll tax back.
What counts as reasonable? FS-2008-25 answers that “there are no specific guidelines for reasonable compensation in the Code or the Regulations,” and that courts decide on the facts of each case. The factors courts have considered, as the fact sheet lists them:
The IRS also says “the key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation by looking to the source of the S corporation’s gross receipts.” It names three sources: the shareholder’s own services, the services of employees who are not shareholders, and capital and equipment. Apply that to a one-truck trade business. If you do the work and sell the jobs yourself, most of the money comes in through the first source. A company where several crews earn the revenue has a stronger case for paying the owner less than the profit.
For “what comparable businesses pay,” the Bureau of Labor Statistics is a fair place to start. It put the median pay of plumbers, pipefitters and steamfitters at $63,800 a year in May 2025. That is one reference point, not a safe harbor. The hours you spend estimating, scheduling and running the books are duties too.
A worked example
Say a plumber runs a one-owner LLC and pays himself a $64,000 salary through an S corporation, close to that BLS median. Here is the payroll and self-employment tax at two levels of profit before his salary, using the 2026 rates above. These are example numbers, not his return.
| Payroll and self-employment tax, 2026 | $120,000 profit | $70,000 profit |
|---|---|---|
| No election: self-employment tax (92.35% of profit × 15.3%) | $16,955 | $9,891 |
| S corporation: Social Security and Medicare on the $64,000 salary, both halves | $9,792 | $9,792 |
| S corporation: FUTA on the salary (0.6% of the first $7,000) | $42 | $42 |
| Saving before the S corporation’s other costs | $7,121 | $57 |
The $70,000 business saves almost nothing, because nearly all of its profit is the salary. The saving only ever comes from the slice of profit above a reasonable salary, at no more than about 14 cents a dollar (15.3% of 92.35%). The table leaves income tax out on purpose. The deduction for half of self-employment tax and the company’s deduction for its share of payroll tax shift the income tax a little either way, and your preparer can run both versions.
The costs that eat the saving
When to file Form 2553
The instructions give two windows: no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year before it. Miss both and the election starts a year later, unless you qualify for relief. Under Rev. Proc. 2013-30, the instructions allow a late election within 3 years and 75 days of the date it was meant to take effect, if you show reasonable cause and acted diligently to correct the miss.
Once you are on payroll, income tax withheld from your salary can cover some of what you used to send in as estimated tax. Form 1040-ES notes that withholding on wages may let you avoid estimated payments on your other income. Run the numbers again with the method in Quarterly Estimated Taxes: When, How Much, and the Safe Harbor.
A one-page test before you file
- Take last year’s net profit from Schedule C, line 31.
- Write down a salary you could defend with the factors above: the BLS figure for your occupation, your duties, your hours.
- Take the profit above that salary, multiply it by 92.35% and then by 15.3%. That is about the most the election saves in payroll tax.
- Subtract the payroll service, the 1120-S preparation fee, your state’s tax and the lost part of the qualified business income deduction.
- If little is left, wait a year and test again. If a real number is left, take this page to whoever prepares your return before you sign Form 2553.
An S corporation is a tool for a business whose profit has grown well past what it would cost to hire someone to do the owner’s job. Below that line it mostly adds paperwork.
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.