The Idea Behind S Corps

As a sole proprietor or single member LLC, all of your net profit is subject to self employment tax of 15.3%, plus income tax. With an S corp, your profit is split into two buckets. You pay yourself a reasonable salary, which has payroll taxes, and you take the rest as a distribution, which is not subject to self employment tax. The split is where the savings come from.

A common pattern for creators is a salary of half to a bit more than half of profit, with the rest as distributions. The exact number depends on your hours, skills, and market pay. Set salary too low and the IRS can reclassify distributions as wages and add tax, penalties, and interest.

The Income Sweet Spot

Rule of thumb: S corp elections start to look good once your net business income consistently reaches the high five figures. The transition zone begins around $60,000 of annual net income, but savings at that level can be small after you pay for payroll, extra fillings, and state fees. Most creators see a clear advantage once they are in the $80,000 to $100,000 net range and higher.

At $100,000 of net income, S corp savings are often meaningful. At $200,000, savings can be five figures if your salary is set correctly and you keep up with compliance.

A Quick Example

Say you bring in net $150,000 after expenses.

• As a sole proprietor, your self employment tax is about $21,194.

• As an S corp, you pay yourself a salary of $82,500 and take $67,500 as a distribution. Payroll taxes on the salary are about $12,622.

• That is $8,572 saved on self employment taxes before you count S corp costs.

Now subtract the admin costs. Typical S corp overhead is $2,600 to $4,000 per year for payroll service, a separate S corp tax return, unemployment taxes, and state fees. In some states you will also owe a franchise tax even if profit is low. California adds a 1.5% S corp tax with an $800 minimum. Your real savings are what is left after these costs.

The Reasonable Salary Rule

The salary has to match what someone would pay for similar work in your market. The IRS looks at your duties, time in the business, skills, what similar roles earn, and the company’s profits. Many creators land in the 50% to 60% salary range, but it is not a fixed formula. Make a short file that explains how you picked the number and keep a copy of any compensation data you used. That memo can save you stress later.

The Real Costs and Chores

S corps save money only if you also accept the extra work that comes with them.

• Payroll all year. You will run payroll, remit taxes, and file quarterly and annual forms.

• A separate tax return. S corps file Form 1120-S in addition to your personal return.

• State fees. Many states require annual reports and fees. Some add franchise or margin tax.

• Bookkeeping discipline. Clean books are not optional. The IRS requires balanced books, and an organized ledger.

Add those costs up before you elect. If your savings after costs are thin, wait until you cross the stronger threshold.

Who Should Not Rush Into an S Corp

• Those making under $60,000 net and still growing. You are likely to save little to nothing after costs. Focus on growth and clean books first.

• Income is lumpy or part time. Payroll is a headache when revenue swings wildly month to month. Build stable patterns, then switch.

• You want simple. A single member LLC without S corp status gives liability protection with less admin. You can always change election later.

Deadline and How to Elect

You elect S corp status by filing Form 2553 with the IRS. For an existing calendar year business, file by March 15 to apply for the current year. For a new entity, file within 75 days of formation. There is late election relief in some cases, but do not rely on it. Put the date in your calendar!

How Creators Decide

Here is a simple decision path that works.

1. Check your previous twelve months. If your net profit is below $60,000, wait. If it is between $60,000 and $100,000, run the math with expenses factored in. If it is over $100,000 and stable, S corp is likely worth it.

2. Pick a defensible salary. Use duties, hours, and comps to set it. Document your train of thought.

3. Price the overhead. Add payroll service, the S corp return, unemployment taxes, and your state fees. If you are in a state with franchise tax, include that.

4. Re-run the $150k style example for your numbers. If savings after costs are meaningful, elect. If not, revisit when you grow more.

5. Keep the door open. Many creators start as an LLC and elect S corp once income justifies the jump. That path is normal.

Common Mistakes to Avoid

• Lowballing salary. It looks tempting on paper and then bites you in an audit. Set a real wage.

• Ignoring state costs. Franchise taxes can erase savings fast. Check your state first.

• Electing too early. If you are still figuring out your offer and income is lumpy, the admin load will feel heavier than the benefit.

• Forgetting the deadline. Miss March 15 and you may be waiting another year.

Bottom Line

S corps help when profit is steady and high enough that the salary plus distribution split beats the self employment tax on everything. For most creators, that starts to happen in the high five figures and becomes the thing to do by six figures. Do the math with your real numbers, include state costs, set a defensible salary, and make the election only when the savings still stand after you factor in the time.

If you want help keeping your books and numbers straight, Beluga Labs tracks your net profit in real time and helps you stay organized with your ledger. This will make your decision 10x easier, and lead you to even more savings!

Keep on Creating!

— The Beluga Labs Team