What Is An S-Corp And Should I Start One?

What is an S-Corp?

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An S Corporation (S-Corp) is a special tax status that can help self-employed people save thousands on self-employment taxes.

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It’s not a type of business entity like an LLC or corporation. It’s a way to tell the IRS you want your business profits taxed differently. If you qualify, you can form an LLC or a corporation and elect to be taxed as an S-Corp instead.

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To qualify for S-Corp status, your business must:

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• Be a U.S.-based entity
• Have only U.S. citizen or resident shareholders
• Have no more than 100 shareholders
• Not be owned by another business (like a corporation or partnership)

Here’s why so many solopreneurs choose to form S-Corps:

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S-Corps are pass-through entities, which means the business itself usually doesn’t pay income tax. Profits pass through to you, the owner, and you can split that income into two parts:

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• A “reasonable” salary (subject to 15.3% payroll taxes)‍
• Distributions (not subject to payroll taxes)

Why does that matter? Because only the salary portion is subject to 15.3% payroll taxes. Distributions aren’t. That income split is what makes the S-Corp such a powerful tax-saving tool.

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Let’s break it down with a real-world example that shows how much self-employment tax you’d pay with vs. without an S-Corp.

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Let’s say you earn $100K profit from your business. 

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Without an S-Corp:

• You pay 15.3% self-employment tax on the full $100,000
• $100,000 × 15.3% = $15,300 in taxes owed

With an S-Corp:
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You pay yourself:

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• $50,000 salary → subject to 15.3% payroll taxes
  
  • Note: 7.65% is withheld from your paycheck (employee share); 7.65% is paid by your S-Corp (employer share)
  • Pro tip: The employer half of your payroll taxes (aka 50% of your payroll taxes) are a business tax deduction!
• $50,000 distribution → 0% payroll taxes

So now:

• $50,000 salary × 15.3% = $7,650 in taxes owed
• $50,000 distribution = $0 in taxes owed

Which means your total taxes owed with S-Corp = $7,650 instead of $15,300.

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TLDR? You just saved over $7,000 by switching how you’re taxed, and that’s before factoring in other S-Corp perks, like retirement contributions or health insurance deduction!

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The primary advantage of an S-Corp is that you only pay payroll taxes on your wages, and your remaining profit from your S-Corp is not subject to self-employment or payroll taxes – only income taxes.

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Want to calculate how much you could be saving with an S-Corp? Use our free S-Corp savings calculator to find out in seconds.

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What’s a “reasonable salary” for my S-Corp?

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If you’re an S-Corp owner, the IRS requires you to pay yourself a reasonable salary before taking any distributions. This rule exists to prevent business owners from avoiding self-employment taxes by labeling all income as untaxed distributions.

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So what counts as “reasonable”?
It depends on your role, industry, experience, and location. Your salary should reflect what you’d pay someone else to do your job.

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Here’s how to figure it out:

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• Research your role on employer review sites like Glassdoor, Salary.com, or BLS.gov.
• Consider your experience level and how many hours you work.
• Document how you calculated your salary (important in case of an IRS audit).

Why it matters:

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• If your salary is too low, the IRS can reclassify your distributions and charge back taxes, penalties, and interest.
• If your salary is too high, you’ll overpay in payroll taxes, which reduces your S-Corp tax savings.

How do I know if an S-Corp is right for me? Should I form an S-Corp?

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If you’re self-employed or a solopreneur, ask yourself:

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• Do I earn at least $60,000 in net profit from my business?
• Do I want to lower my self-employment tax bill?
• Am I okay with doing a little more admin (like running payroll)?

If you said yes, an S-Corp could be a great move.

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Why $60,000? It’s not a hard rule, but it is a common benchmark. Below that, the tax savings may not be worth the extra admin work.

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Pro tip: If you want to be even more accurate, then your net business profit should be at least $15,000 more than what you’d reasonably pay yourself as a salary. That’s how you unlock meaningful tax savings through S-Corp distributions.

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What if I missed the S-Corp deadline?

Just because an S-Corp may be right for you doesn’t mean you can form one right away. To save money on your 2025 taxes, you must elect S-Corp status by March 15, 2025 (or within 75 days of forming your business).

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But if you missed the deadline, don’t worry! There are still ways to reduce your tax bill this year, even without an S-Corp.

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One of the most powerful strategies is maxing out self-employed retirement contributions.

If you're a solopreneur or small business owner, you can open a Solo 401(k) or SEP IRA and deduct contributions from your business income. This will lower your taxable income.

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In 2025, you can contribute up to $69,000–$76,500, depending on the plan type and your age. That’s a huge potential tax write-off and a smart move if you still want to save big on taxes this year despite missing the S-Corp election deadline.

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Pro tip: If your spouse works in the business too, you can both contribute, doubling the savings.

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What are the main benefits of an S-Corp? S-Corp benefits

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If you qualify, electing S-Corp status can unlock powerful tax and business advantages, including:

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• Lower self-employment taxes: You can split your income into salary and distributions, which may reduce your tax bill significantly.
  
• Built-in legal protection: If you're structured as an LLC or corporation, choosing S-Corp status won’t affect your liability shield.
  
• More professional image: Running payroll and filing as an S-Corp can boost credibility with banks, clients, and potential partners.
  
• No double taxation: Unlike C Corps, S-Corps pass profits directly to you, so you’re only taxed once.

These benefits make the S-Corp especially attractive for self-employed people ready to grow smarter and save more in taxes.

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What are the main downsides of an S-Corp?

S-Corps come with great tax advantages, but they’re not for everyone. Here are a few key drawbacks to keep in mind:

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• More paperwork: You’ll need to set up payroll, file quarterly tax returns, and complete additional forms like Form 1120S, W-2s, and K-1s.
  
• Higher ongoing costs: Expect to pay for payroll software, bookkeeping tools, and possibly a tax professional to stay compliant.
  
• Not ideal for lower profits: If your net profit is under $60,000, the tax savings may not justify the extra complexity and admin work.
  

Bottom line: S-Corp status makes the most sense for self-employed folks with steady, higher earnings who are ready to run their business more formally.

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What’s the difference between a Solo Proprietorship, LLC, and S-Corp? Sole prop vs. LLC vs. S-Corp

Most people start as sole proprietors. It’s the default setup when you freelance or run a business on your own. Even if you form a single-member LLC, you’ll still be taxed the same way unless you elect a different tax status.

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That means all your profit gets taxed like a paycheck, with no special breaks.

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An S-Corp lets you split your income:

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• Part as a salary (taxed normally)
• Part as a distribution (not subject to self-employment tax)
  

That split can save you thousands if you're making over $60K in profit.

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Do I need an LLC first before starting an S-Corp?

Not necessarily. You don’t need an LLC to form an S-Corp. You can start as a corporation and elect S-Corp status right away using IRS Form 2553.

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That said, many solopreneurs choose to form an LLC first, then switch to S-Corp taxation. Why? Because an LLC is simple to set up and manage, and once your business starts earning steady profit, filing for S-Corp status lets you unlock serious tax savings.

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How do I start an S-Corp? (Step-By-Step Guide) How do I form an S-Corp (step-by-step)

Here’s a clear, no-fluff roadmap to starting and running your S-Corp the right way:

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1. Register your business

• Decide whether to form an LLC or Corporation. Check if your business name is available in your state.
• File Articles of Organization (LLC) or Articles of Incorporation (Corp).
• Appoint a registered agent (required in most states).
• Pay your state’s one-time formation fee.

2. Get an EIN (Employer ID Number)

• Apply for free online at IRS.gov.
• You'll need this for banking, taxes, and payroll.

3. File Form 2553 to elect S-Corp status

• Submit within 75 days of forming your business or by March 15 for the current tax year.
• Missed the deadline? Attach a “reasonable cause” letter — the IRS may still approve it.

4. Set up payroll and pay yourself a salary

• Choose a reasonable salary.
• Not sure how much to pay yourself? Use employer-review sites like Glassdoor, Salary.com, or BLS.gov.
• Use payroll software like Gusto, ADP, or QuickBooks Payroll.
• Deposit payroll taxes monthly (usually due by the 15th of the following month)
• Pay payroll taxes:
  
  • Quarterly: Form 941
  • Annually: Form 940 and W-2s

5. Separate your business finances

• Open a dedicated business bank account.
• Use bookkeeping or expense-tracking software to monitor deductions (Keeper does this for you automatically!)

6. File your taxes correctly

• Submit your S-Corp’s annual tax return: Form 1120S.
• Send yourself:
  
  • A W-2 (for your salary).
  • A K-1 (for your share of profits).
  • Paying contractors? File Form 1099-NEC for anyone you paid $600 or more.

7. Stay compliant with your state

• File your state’s annual report or franchise tax return, if required.
• Renew your business license annually (if applicable).

Don’t want to deal with all the paperwork? Keeper can handle the full process for you from formation and payroll to S-Corp tax filings and expense tracking!

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How much does it cost to start and maintain an S-Corp? How much does an S-Corp cost?

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The cost of an S-Corp varies depending on your state and whether you file everything yourself or use a professional. On average, expect to pay between $50–$1,100 to get started, and $300–$4,800 per year to keep your S-Corp IRS compliant. That includes things like business registration, payroll setup, and S-Corp tax filing (Form 1120S). If you're comparing options, this guide breaks down both one-time and ongoing S-Corp costs so you know exactly what to budget for.

First-Year Costs:

Ongoing Costs:

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Keeper offers clear, upfront pricing for S-Corp formation and filing

Unlike many S-Corp tax and formation services that hide key pricing details or surprise you with extra fees, Keeper is refreshingly transparent. You’ll pay a one-time $50 fee to form your S-Corp, and choose from flexible annual plans that cover everything from expense tracking and tax consultations to federal and state S-Corp tax filing.

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No upsells. No confusing packages. Just simple, predictable pricing, and a 14-day free trial to try Keeper risk-free.

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The best part? Keeper is a tax-deductible expense you can automatically claim when you file with us!

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Keeper makes S-Corp formation simple, so you can focus on your business, not your bookkeeping.

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