Most business owners are unknowingly throwing away thousands of dollars each year simply because they chose the wrong business structure. In fact, research shows that nearly 75% of entrepreneurs are either in the wrong entity altogether or not fully optimising the one they already have.

And one of the biggest questions that keeps coming up is:
👉 “Should I switch to an S-Corp?”

The frustrating truth is that most CPAs give a one-size-fits-all answer—either pushing everyone toward an S-Corp because of “tax savings” or steering people away because of the extra paperwork. Both approaches miss the mark.

The reality? The right answer depends on your numbers, your consistency, and your goals.

In this article, we’ll break down:

• When an S-Corp actually makes sense (and when it doesn’t).

• How the tax savings really work.

• The hidden costs most people overlook.

• Advanced strategies that can save you even more.

By the end, you’ll have a clear framework to decide whether staying an LLC or switching to an S-Corp is the right move for your business.

Why Business Structure Matters

If you’re operating as a sole proprietorship or LLC, you’re paying self-employment tax—and this is where many entrepreneurs get crushed.

Self-employment tax is 15.3% on all of your business income.

So, if you net $100,000 in profit, that’s over $15,000 in self-employment taxes alone, before you even touch federal and state income tax.

Why so high? Because as a business owner, you’re both the employee and the employer. Instead of splitting FICA taxes (like you did when you were employed), you’re paying the full 15.3% yourself.

That’s money you could be reinvesting into your business or building wealth with.

How an S-Corp Can Help

Here’s where the S-Corp election comes in.

With an S-Corp, you split your income into two parts:

• Salary (subject to payroll taxes)

• Distributions (not subject to payroll taxes)

Let’s look at a $100,000 example:

• As an LLC, you’d pay about $27,300 total in taxes.

• As an S-Corp (with a $50K salary + $50K distribution), your taxes drop to about $19,650.

That’s a savings of $7,650 per year.

But there’s a catch: the IRS requires you to pay yourself a reasonable salary. Pay too little and you risk an audit. Pay too much, and you wipe out the tax benefits.

The Hidden Costs of an S-Corp

Switching to an S-Corp isn’t free. Here are some of the extra expenses to expect:

• Payroll processing: $500–$1,000/year

• More complex tax return: $1,000–$2,000+/year

• State franchise fees: $200–$800/year

• Compliance requirements: variable

On average, these add up to $1,700–$3,800 annually.

That means the real break-even point is usually around $60,000 in consistent net income. Below that, the costs often outweigh the benefits.

The Sweet Spot: When an S-Corp Makes Sense

• At $40,000 net income, savings might only be $500—not worth it.

• At $60,000, you’re saving around $2,000—it starts to make sense.

• At $100,000, the savings often exceed $5,000—definitely worthwhile.

The keyword here is consistency. If you’re having one “big year” but don’t have steady revenue, an S-Corp might actually hurt more than it helps.

Advanced S-Corp Strategies

Once you’re in the right place financially, S-Corps open the door to advanced tax strategies:

1. Accountable Plan

Your business reimburses you for expenses (home office, travel, health premiums) tax-free. Huge savings when done properly.

2. Retirement Plan Supercharging

With a Solo 401(k), you can contribute far more than a standard IRA, potentially saving $20,000+ in taxes annually.

3. The Augusta Rule

Your S-Corp can rent your home for business purposes (like board meetings) up to 14 days per year. That income is tax-free for you but deductible for the business.

Step-by-Step Framework to Decide

1. Check your numbers – Are you netting $60,000+ consistently?

2. Assess your business model – Steady income or feast/famine cycles?

3. Consider your growth plans – Will you reinvest or take distributions?

4. Evaluate your capacity – Can you handle payroll and compliance?

5. Think long-term – Lifestyle business or preparing for a sale?

Remember: there’s no one “best” structure. The right choice depends on where you are in your journey.

FAQs

Q1: What’s the main difference between an LLC and an S-Corp?
An LLC pays self-employment tax on all profits, while an S-Corp lets you split income into salary + distributions, reducing payroll taxes.

Q2: Do I need to switch to an S-Corp as soon as I make a profit?
Not necessarily. For most businesses, the sweet spot starts at around $60,000 in consistent net income.

Q3: Can I switch back if I regret electing S-Corp status?
Yes, but it can be complicated. That’s why it’s important to run the numbers before making the switch.

Q4: Will an S-Corp help if I’m planning to reinvest all my profits?
Maybe not. If you’re not taking distributions, the tax savings may not outweigh the extra costs.

Q5: How do I know what a “reasonable salary” is?
It’s what you’d pay someone else to do your job. Often this requires guidance from a tax strategist or CPA to document properly.