The S-Corp Election That Saved
a Consultant $14,000

The Situation

Marcus is an independent IT consultant in Orange County. He runs his business as a sole proprietor, invoices clients through a simple LLC, and files a Schedule C each year. In 2024, his net profit was $180,000 — a number that would make most people envious.

But Marcus had a problem his previous CPA never flagged: he was paying self-employment (SE) tax on every dollar of that profit. At 15.3% on the first $168,600 of net self-employment income, and 2.9% above that threshold, his SE tax bill alone was running north of $25,000 per year — before income tax.

The Strategy: S-Corp Election

An S-Corp is not a different type of company — it's a tax election you file with the IRS (Form 2553). Marcus's LLC could stay exactly as it was legally. The change was purely in how the IRS taxed the profits flowing out of it.

Here's what changed operationally:

• Reasonable Salary: Marcus put himself on payroll at $80,000 per year — a documented, defensible compensation for someone doing his type of work. This salary is subject to FICA taxes (the W-2 equivalent of SE tax).
• Distributions: The remaining profit — approximately $100,000 after salary and business expenses — flows to Marcus as an S-Corp distribution. Distributions are not subject to self-employment or FICA taxes.
• Same deductions, same income: Marcus still deducts home office, equipment, software subscriptions, and professional development. His total taxable income for federal income tax purposes remained effectively the same.

The only new recurring costs: payroll processing (~$600/year with a simple service like Gusto or QuickBooks Payroll) and a modest increase in CPA time to prepare a corporate tax return (Form 1120-S) in addition to his personal return.

The Numbers: Before vs. After

Here's a simplified view of Marcus's tax picture before and after the S-Corp election, assuming $180,000 in net business income:

That $14,000 is money Marcus keeps — every single year. Over a decade, compounded with investment growth, the cumulative impact easily surpasses $200,000.

Key Takeaways

• The S-Corp election is most valuable when net business profit consistently exceeds $50,000–$60,000 per year.
• The "reasonable salary" requirement is real — the IRS scrutinizes S-Corp owners who pay themselves too little. A defensible salary is typically based on what you'd pay someone to do the same work.
• The election does add administrative complexity: payroll taxes, quarterly deposits, a corporate return. These costs are almost always far smaller than the tax savings.
• Timing matters. To be effective for the current tax year, Form 2553 must typically be filed within 75 days of the start of the year (or within 75 days of forming the entity). Late elections are possible in some cases.
• State treatment varies. California, for example, imposes an 1.5% S-Corp franchise tax on net income — which reduces but does not eliminate the federal savings.