Question 1

When does an S-Corp save money over a sole proprietorship?

Accepted Answer

An S-Corp typically starts saving money when net business profit exceeds roughly $40,000–$60,000 per year, depending on your state and filing status. The savings come from paying self-employment tax only on a reasonable salary rather than all net profit. Below that range, the S-Corp's compliance costs (payroll service, separate tax return, state fees) often exceed the tax savings.

Question 2

What is a reasonable salary for an S-Corp owner?

Accepted Answer

The IRS requires S-Corp owners who perform services to pay themselves a 'reasonable salary' before taking distributions. Reasonable salary depends on industry, experience, location, and hours worked. Common guidance suggests 50–70% of net profit, but the IRS looks at what similar employees would earn for comparable work. Setting it too low risks an IRS audit and reclassification of distributions as wages.

Question 3

What is the difference between an LLC and an S-Corp?

Accepted Answer

An LLC (limited liability company) is a legal entity type, while an S-Corp is a tax election. A single-member LLC is taxed the same as a sole proprietorship by default — all profit is subject to self-employment tax. An LLC can elect S-Corp tax treatment (Form 2553), which allows the owner to split income between salary (subject to payroll tax) and distributions (not subject to payroll tax), potentially reducing total tax at higher income levels.

Business Entity Comparison

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Sole Prop Net

LLC Net

S-Corp Net

S-Corp Crossover

Total Tax + Compliance Cost