S-corp election deadline approaching — worth it at $95K net income?

My accountant says I should elect S-corp status for my consulting LLC this year. I netted about $95K last year and she estimates the S-corp would save me $4,000 to $5,000 in self-employment tax annually. The Form 2553 deadline is March 15 for it to be effective this year.

The thing is, the S-corp adds complexity. I need to run payroll for myself, file an 1120-S, and there are additional compliance costs. My accountant charges $1,500 more per year for S-corp returns. Is a net savings of $2,500–$3,500 worth the hassle? At what income level does this really make sense?

Your accountant is giving you reasonable numbers. At $95K net, the S-corp election typically makes sense, but the math depends on what you set as a “reasonable salary.” The IRS requires S-corp owner-employees to pay themselves a reasonable salary before taking distributions. Only the salary portion is subject to FICA (Social Security and Medicare) tax.

For a consultant netting $95K, a reasonable salary might be in the $55K–$65K range depending on your industry and geography. The remaining $30K–$40K would come as a distribution not subject to the 15.3% SE tax. That is where the $4K–$5K savings comes from.

The break-even point where S-corp typically makes sense is around $50K–$60K in net self-employment income after deductions. Below that, the additional compliance costs (payroll service, separate tax return, potential state-level S-corp taxes) tend to eat up the savings. At $95K you are solidly above that threshold.

Regarding Form 2553: the deadline is 75 days from the start of the tax year, which for calendar-year entities means March 15. If you miss it, you can file a late election with reasonable cause, but do not count on that. Make a decision before March 15.

I made the switch at around $80K net two years ago and it has been worth it. The payroll piece sounds scary but I use Gusto and it costs me $40 a month. It handles all the payroll tax filings automatically. Compared to the $4K+ I save in SE tax, the payroll cost is nothing.

One thing people forget: you also need to pay yourself at regular intervals. The IRS does not like it when S-corp owners take one big salary payment at year-end. Set up at least monthly payroll and actually run it consistently.

Thanks everyone. The Gusto suggestion is helpful — my accountant quoted me $100/month for payroll through her firm, which felt high. If I can do it for $40 that changes the math quite a bit.

I think I am going to go ahead with the election. My accountant is preparing the 2553 now. One last question: does the reasonable salary need to be consistent all year, or can I adjust it if my income ends up being lower than projected?

You can adjust the salary during the year, but I would caution against drastic changes without a clear business reason. The IRS looks at the total annual compensation relative to the total net income. If you net $95K and paid yourself a $30K salary, that is going to raise eyebrows regardless of when it was paid.

The safest approach is to set a salary based on your projected income at the start of the year and stick to it. If your business takes a genuine downturn, reducing your salary proportionally is fine. Just document the business reason.

Something else to think about: the S-corp election affects your QBI deduction under Section 199A. The salary you pay yourself reduces your qualified business income, which reduces your QBI deduction. At $95K you are well within the income limits, so you would get the full 20% deduction on the distribution portion.

It is a bit of a balancing act. Higher salary means more FICA but lower QBI deduction impact. Lower salary means less FICA but more audit risk. Your accountant should be able to model the optimal salary that maximizes total tax savings when both FICA and QBI are considered.