Should Your LLC Elect S-Corp Status? The Real Break-Even Math

“Should I become an S-corp?” is probably the most common question a profitable freelancer or LLC owner asks — and the internet answers it badly in both directions. TikTok says everyone should elect; a burned owner who elected too early says no one should. The truth is a math problem with a clear break-even.

What the election actually does

First, housekeeping: an S-corp is a tax election, not a new company. Your LLC keeps existing legally; you file Form 2553 and the IRS taxes it differently.

The difference: an LLC owner’s entire profit is subject to self-employment tax (15.3% on a large portion of it). An S-corp owner splits profit into a reasonable W-2 salary (subject to payroll tax) and distributions (not subject to it). The savings live in the gap between total profit and the salary you must reasonably pay yourself.

The math on a real example

Consultant netting $180,000:

•             As an LLC: self-employment tax runs roughly $21–22,000 (with the wage base capping the Social Security piece).

•             As an S-corp with a defensible $90,000 salary: payroll taxes on the salary run about $13,800.

Gross savings: roughly $7–8,000 a year. Real — but not the whole story.

The costs nobody puts in the TikTok

•             Payroll: you must run actual payroll on yourself — software or a service, filings each quarter ($600–1,500/yr).

•             A separate business tax return (Form 1120-S), professionally prepared.

•             State layer: New Jersey and New York recognize S-corps but add their own filings, minimum taxes/fees, and — on the upside — PTET/BAIT eligibility. NYC, notably, does not fully honor S-corp treatment, which changes the math for city-based businesses.

•             QBI interaction: salary you pay yourself isn’t qualified business income, so the election can shrink your 20% QBI deduction even while saving payroll tax. At some income levels the wage limitation pushes the other way. This interaction alone flips the answer for some owners.

•             Retirement plan effects: your solo 401(k)/SEP employer contribution keys off W-2 wages — a leaner salary means less contribution room. If you’re a maximal saver, that matters.

The honest break-even

All-in, the election typically carries $1,500–3,000 of annual cost and administrative weight. As a rule of thumb:

•             Under ~$60,000 of consistent profit: don’t. The savings won’t clear the costs.

•             $60,000–100,000: the gray zone — run the numbers with QBI and retirement goals included.

•             Consistently above ~$100,000: the election usually wins, and the more profit grows past your reasonable salary, the more it wins.

“Consistent” is doing real work in those sentences. One good year is not a trend, and unwinding an election is messier than making one.

Timing

The election is generally due March 15 for the current year (or within 75 days of forming a new entity). Miss it and late-election relief often works — but the cleanest path is deciding in Q1, with payroll set up properly from the start rather than reconstructed in December.

The right way to decide

Bring last year’s Schedule C and a current-year projection, and model four numbers side by side: SE tax as-is, payroll tax under a defensible salary, the QBI deduction under each, and the admin cost. The answer falls out in twenty minutes — and it’s your answer, not a content creator’s.

Romanchuk CPA LLC runs the S-corp break-even analysis as a standard part of onboarding new business clients — and tells you honestly when the answer is “not yet.” Book at rfg.tax.

This article is general information, not tax advice for your specific situation.