Question 1

When does an S-Corp election make sense?

Accepted Answer

Generally, S-Corp makes sense when your net business profit exceeds $50,000–$60,000 annually. Below that, the administrative costs ($1,500–$3,000/year for payroll, tax returns, etc.) can outweigh the tax savings.

Question 2

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

Accepted Answer

The IRS requires S-Corp owners to pay themselves a 'reasonable salary' before taking distributions. This is typically 40–60% of net profit, benchmarked against what someone in a similar role would earn. Setting it too low invites IRS scrutiny.

Question 3

How does an S-Corp save on taxes?

Accepted Answer

With an LLC taxed as a sole prop, all net profit is subject to 15.3% self-employment tax. With an S-Corp, only your W-2 salary is subject to FICA (payroll tax). The remaining profit is passed through as distributions — not subject to SE/FICA tax.

Question 4

What are the administrative costs of an S-Corp?

Accepted Answer

S-Corps require: payroll processing ($500–$1,500/year), a separate corporate tax return Form 1120-S ($500–$1,500), and possibly a registered agent fee. Total annual admin cost is typically $1,500–$3,000.

Question 5

Can I switch from LLC to S-Corp mid-year?

Accepted Answer

You can elect S-Corp status by filing Form 2553 with the IRS. To be effective for the current year, it must be filed by March 15. Late elections are possible with reasonable cause. You don't need to change your LLC — you're just changing the tax classification.

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