When does an S-corp actually start saving you money?

How the saving actually works

As a sole proprietor you pay self-employment tax on essentially all your profit. Elect S-corp treatment and you split it: you pay yourself a reasonable salary, which carries payroll tax, and take the rest as a distribution, which doesn't. The saving is 15.3% of whatever falls on the distribution side.

The word doing all the work is "reasonable"

You can't pay yourself $1 and take $200,000 as distributions. The salary must be defensible for the work you actually do — what you'd have to pay someone else to do your job. Setting it artificially low is one of the more reliably audited things in small business tax.

The 50% default here is a common starting point, not a rule. Discuss the number with an accountant, because it's the number that gets questioned.

What it actually costs

• Payroll. You now run real payroll with real filings — a service, monthly, all year.
• A second tax return. The S-corp files its own (Form 1120-S), on top of your personal one.
• Bookkeeping that has to be right. Mixing personal and business money in an S-corp is a much bigger problem than doing it as a sole prop.
• State fees. Vary enormously — California's $800 minimum franchise tax is a very different story from Texas's nothing.

Two to three thousand a year is a realistic all-in figure for a small operation, which is why the break-even sits where it does.

The honest summary

There is no universal threshold — it depends entirely on your salary split and what the admin actually costs you, which is why this calculator asks for both rather than quoting a number at you. Run it with your real figures. Below your break-even, electing costs more than it saves.

It also adds obligations that don't go away in a bad year, and creator income is volatile. A great year followed by a thin one leaves you running payroll for a business that isn't earning, which is a genuinely unpleasant place to be.

Run the number, then talk to an accountant before filing anything. This is a genuinely good question to pay someone for.