Ask Maxi · Entities
Should I elect to be an S corporation?
Usually only once your business profit is steady and meaningfully above what you would pay yourself as a salary. Below that, the cost of running it eats the savings.
Here is the real trade. As an S corp you put yourself on payroll at a reasonable salary, and the profit above that salary is not subject to self-employment tax. That is the savings. Against it: payroll every month, quarterly payroll filings, a separate business tax return, more bookkeeping, and a higher tax prep fee.
Somewhere around $40,000 of profit after a reasonable salary is where the math usually starts to work, but that number moves with your state, your health insurance, and how steady the income is. One good year is not a reason to elect.
The salary is where people get hurt. Reasonable means what you would pay someone else to do your job. Paying yourself $12,000 on $150,000 of profit is the most common way an S corp election turns into an audit.
The election is generally due by March 15 to apply to the whole year.
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