08/23/2026
When Should You Elect S Corporation Status? Probably Later Than You Think.
One of the most common pieces of tax advice given to new business owners is:
“You need to elect to be taxed as an S corporation.”
Sometimes that’s great advice.
Sometimes it’s way too early.
An S corporation can create meaningful tax savings because, once the business is generating enough profit, the owner may be able to take a portion of that profit as distributions rather than wages subject to payroll taxes.
But there’s an important catch:
If you work in your S corporation, you generally need to pay yourself reasonable compensation before taking non-wage distributions.
So, consider a business generating $50,000 of profit where reasonable compensation for the owner’s work is also around $50,000.
What exactly did the S election accomplish?
Potentially very little.
You may have simply traded a relatively simple tax return for:
• Payroll and payroll tax filings
• A separate S corporation tax return
• Additional bookkeeping requirements
• W-2 reporting
• Reasonable-compensation documentation
• Higher accounting and compliance costs
Now consider that same business generating $150,000 of profit, with reasonable owner compensation of $75,000.
That’s a very different conversation.
There may now be a meaningful amount of profit available for distributions that aren't subject to Social Security and Medicare taxes.
That’s where an S corporation can start becoming a valuable tax-planning tool.
The mistake is assuming there’s a magic revenue number where everyone should make the election.
There isn’t.
The decision should be based on profit, not revenue—and should consider reasonable compensation, payroll costs, additional tax-preparation fees, state taxes, retirement-plan goals, and the owner’s overall tax situation.
Elect too early, and the compliance costs can eat up much of the tax savings you were trying to create.
Elect at the right time, and an S corporation can be an excellent tax strategy.
The goal isn’t to become an S corporation as quickly as possible.
The goal is to become an S corporation when it provides value.
