The S-corp election, demystified.

An S-corp is not an entity type — it is a tax election a corporation or LLC can make. The mechanics: the company runs payroll for the active owner at a reasonable salary, then any remaining profit flows through as a distribution that is not subject to self-employment tax. The savings come from the gap between the payroll-tax-bearing salary and the distribution piece. The catch is that "reasonable comp" is not optional. The IRS has audited and recharacterized owners who paid themselves a $30,000 salary on $400,000 of profit. A defensible reasonable-comp figure is industry-specific and documented. The other catch is administrative cost. Running an S-corp adds payroll filings, an 1120-S return, K-1s, and state-level S-corp taxes in places like California and New York. If your net income is under roughly $50,000, the costs often exceed the savings. We model the actual after-tax outcome before recommending the election, run reasonable-comp analysis tied to comparable-data sources, and handle the filings in-house once the election is made.