S-Corp Decision Guide

What Is an S-Corp?

An S-corp isn't a type of business — it's a tax election. Your LLC or corporation elects to be taxed under Subchapter S of the tax code.

The Math: How S-Corp Saves Money

Without S-Corp (Sole Prop or Single-Member LLC)

• All profit subject to self-employment tax (~15.3%)
• $200,000 profit = ~$28,000 in SE tax

With S-Corp

• You pay yourself a salary → payroll taxes on salary only
• Remaining profit comes as distributions → no payroll taxes
• $200,000 profit with $100,000 salary = ~$14,000 in payroll taxes

When S-Corp Makes Sense

• Consistent profit above $80,000–$100,000 The savings need to outweigh the added complexity.
• Stable, predictable income Lumpy or unpredictable income makes S-corp harder to manage.
• You're comfortable with payroll S-corps require running payroll (for yourself, at minimum).
• You can commit to reasonable salary You must pay yourself a "reasonable" salary — the IRS watches this.
• Your state doesn't penalize S-corps Some states (California, notably) have additional taxes on S-corps.

When S-Corp Doesn't Make Sense

• Profit under $60,000–$70,000 The savings are minimal; complexity isn't worth it.
• You're just starting out Wait until you have consistent profitability.
• Planning to sell soon S-corp can complicate asset sales. Talk to an advisor first.
• Your state has unfavorable rules California charges $800+ minimum franchise tax plus 1.5% on income.
• You hate administrative overhead S-corps add payroll, additional filings, and compliance requirements.

The Decision Framework

1. Calculate your expected profit Not revenue — profit. What's left after expenses.
2. Estimate your reasonable salary What would you pay someone to do your job? (Usually 50–70% of profits for physician-owners who provide services)
3. Calculate potential savings (Profit - Salary) × 15.3% = approximate payroll tax savings
4. Factor in added costs Payroll service: $500–$1,500/yr • Additional tax prep: $500–$1,500/yr • Your time managing payroll
5. Compare If savings > costs by a meaningful margin, S-corp likely makes sense.

Example Calculation

Scenario: $180,000 profit, $90,000 reasonable salary

Over 10 years: ~$96,000 saved

Reasonable Salary: The Critical Factor

The IRS requires S-corp owners to pay themselves a "reasonable salary" before taking distributions.

Factors that determine reasonable:

• Your role (provider vs manager)
• Your specialty
• Your geography
• Hours worked
• Practice size and revenue

Rule of thumb for physician-owners:

• Full-time clinical work + management: 50–70% of distributions as salary
• Primarily management, minimal clinical: 30–50% as salary

How to Make the Election

Timing: File Form 2553 within 75 days of the start of the tax year (by March 15 for calendar year taxpayers).

Missed the deadline? You may be able to request late election relief.

What changes:

1. You start running payroll (for yourself at minimum)
2. You file an S-corp return (Form 1120S) plus your personal return
3. You receive a K-1 showing your share of income
4. You maintain corporate formalities (separate bank account, records)

Your Decision Worksheet