Summary of What This Blog Covers:
- Uncover when S corporation status actually saves money and when it doesn’t: This blog explores how switching to an S Corp can reduce self-employment tax, but also shows how added payroll, compliance, and tax filing costs can cancel out savings if your net profit isn’t high enough.
- Learn how to calculate a reasonable salary and avoid IRS red flags: You’ll discover why paying yourself the right amount as an S Corp owner is critical, what the IRS expects, and how a certified public accountant can help you determine the right number based on your role and industry.
- Understand the administrative and tax filing responsibilities that come with S Corp status: From Form 1120-S and W-2s to quarterly payroll filings and FBAR reporting, this guide outlines everything you need to know before making the S Corp leap.
- Get expert guidance from a licensed CPA in Austin, Texas before filing Form 2553: The blog explains how Insogna CPA helps business owners evaluate tax structure options, file S Corp paperwork, manage compliance, and optimize their tax strategy year-round.
Let’s clear the air.
You’ve been growing your business. Maybe you’re finally seeing consistent five-figure months, or you’ve hit that six-figure stride. And naturally, you’re thinking, “Time to level up. Should I switch to an S Corp?”
Your internet search results probably tell you yes. Your favorite finance influencer says absolutely. Even your neighbor with the landscaping business swears it cut his tax bill in half.
But what if I told you they might all be… partially right and also missing the bigger picture?
At Insogna CPA, a leading CPA firm in Austin, Texas, we’ve helped hundreds of business owners assess this very question. The truth is, S Corporations can save you money but only if your business is ready. Jump in too early or without a strategy, and your S Corp may cost you more than it saves.
Let’s walk through when an S Corp is brilliant… and when it’s just a shiny tax trap in disguise.
Why Everyone Talks About S Corps and What They’re Not Saying
The S Corp strategy has gone viral in recent years, especially among self-employed professionals, consultants, and small business owners.
And to be fair, there’s a reason it gets so much attention:
“Elect S Corp status, pay yourself a salary, take the rest as distributions, and save on self-employment taxes!”
Sounds amazing, right?
The theory: as an S Corporation, your business can pay you a salary, and then you take any remaining profit as dividends or distributions—which are not subject to self-employment tax. That 15.3% you’ve been paying on all your income as a sole proprietor? Gone. Or at least reduced.
So, what’s the catch?
The Real Costs Behind S Corporation Status
Before you file Form 2553 and become an S Corp overnight, you need to know what you’re signing up for. Because for every dollar you save on self-employment tax, you could be spending more than a few cents in new compliance costs.
Here’s what switching to an S Corp really means:
1. Payroll Processing Is Mandatory
Even if you’re the only employee in your business, S Corp owners are legally required to pay themselves a reasonable salary through payroll.
That means:
- Choosing a payroll provider (Gusto, ADP, etc.)
- Withholding federal and state income tax
- Paying employer payroll taxes (Social Security + Medicare)
- Filing quarterly payroll tax forms (Form 941), W-2s, and state unemployment forms
This isn’t optional. Even a single-person S Corporation needs full payroll.
Cost Estimate: $600–$1,200/year in payroll processing and employer tax obligations
2. Your Tax Return Just Got a Lot More Complicated
Unlike a sole proprietorship or single-member LLC (which files Schedule C with your personal return), an S Corp files Form 1120-S, a separate corporate tax return.
And if you’re paying yourself a salary? That means:
- Filing a W-2 as your own employee
- Preparing a K-1 to report your business earnings
- Possibly filing state S Corp returns (even if Texas doesn’t have income tax)
More forms, more paperwork, more room for error and yes, higher CPA fees.
Cost Estimate: $1,200–$2,500/year in additional accounting and tax prep costs
3. You Have More Administrative Responsibility
Running an S Corp also means:
- Holding annual meetings (yes, even if it’s just you)
- Keeping corporate minutes and bylaws
- Opening separate bank accounts
- Being prepared for an IRS audit if your salary is questioned
This isn’t casual entrepreneurship anymore. You’re running a corporation now and that comes with legal obligations.
If you’re not ready to stay organized, this can get messy fast. That’s why having a tax advisor near you who understands your entity structure is critical.
When an S Corp Actually Makes Sense
So, with all that, is it ever worth it?
Yes, but only when the math works.
Our General S Corp Rule of Thumb:
- Under $50K in net profit? Stick with your LLC or sole proprietorship.
- $50K–$75K in net profit? Run the numbers with a CPA and evaluate the break-even point.
- $100K+ in net profit? Time to seriously consider the S Corp. You’re probably ready.
Let’s say your business earns $120,000 in net income (after expenses). As a sole proprietor, you’d owe 15.3% self-employment tax on the full amount: roughly $18,360.
As an S Corp, if you pay yourself a reasonable salary of $60,000 and take the rest as distributions, you only pay self-employment tax on the salary portion, saving you roughly $9,000.
Subtract out payroll and CPA costs, and you could still walk away with $5,000–$7,000 in real annual tax savings.
That’s not pocket change and we help our clients get there.
The Importance of a “Reasonable Salary”
Now let’s talk about the IRS’s favorite phrase: reasonable compensation.
When you’re an S Corp owner, you can’t just pay yourself $10,000 and take $90,000 in distributions. The IRS watches this closely.
The Salary Must Be:
- Similar to what someone in your industry/role would be paid
- Consistent with the hours you work
- Backed by market data or benchmarks
Pay yourself too little? Risk audit and penalties. Pay yourself too much? You erase your tax savings.
At Insogna CPA, we help you determine this salary based on IRS standards, your revenue, and your role. We also make sure your payroll, W-2s, and taxes are all filed correctly.
FBAR Filing, 1099s, and Other IRS Traps
If you operate multiple entities or handle money internationally, there’s more to think about.
Additional S Corp Responsibilities:
- Collecting W9 tax forms from all contractors
- Issuing 1099 NEC forms to anyone you pay $600+
- Receiving 1099K forms from Stripe, PayPal, or Square
- Filing FBAR (Foreign Bank Account Report) if your foreign accounts exceed $10,000
A missed filing or form, especially an FBAR, can lead to penalties of $10,000 or more.
This is why working with a licensed CPA or certified professional accountant (like our team at Insogna CPA) is crucial. You need someone who watches the fine print, so you can focus on your clients and revenue.
S Corp Alternatives to Consider
Still not sure about S Corp status? That’s okay. It’s not for everyone.
Here are a few alternatives:
- Stay a single-member LLC, and reinvest profits to grow.
- Use a solo 401(k) or SEP IRA to reduce taxable income.
- Consider an LLC taxed as a partnership if you have a co-founder.
Your business structure should match your goals, income, and capacity for compliance. At Insogna CPA, we help you compare all options, not just push the “S Corp button.”
How We Help at Insogna CPA
Here’s what you get when you work with us (besides peace of mind):
- Personalized S Corp evaluation using your real financials
- Form 2553 filing and S Corp setup, handled start to finish
- Reasonable salary calculation with IRS-compliant documentation
- Complete tax preparation services, including Form 1120-S, W-2s, and payroll
- Quarterly reviews and annual tax planning
- Filing of FBAR, 1099s, and W9s, with audit-ready records
Whether you’re searching for a tax preparer near you, a CPA near you, or just someone who actually picks up the phone when you call, we’ve got you.
Final Thoughts: Know Before You Elect
Electing S Corp status isn’t something you want to undo later. The paperwork alone will make your head spin. So get it right the first time.
If your profits are steady, your admin game is solid (or your CPA is), and your business is ready for the next level, S Corps can absolutely reduce your tax burden and increase your take-home pay.
But if you’re still building, still side-hustling, or just not ready for the extra complexity, you might be better off waiting until the numbers make sense.
Book Your S Corp Strategy Session Today
Still wondering whether an S Corp will save you money or cost you more?
Let’s find out together.
Schedule a consultation with Insogna CPA, your go-to Austin, Texas CPA, and let’s crunch the numbers, evaluate the structure, and build a tax strategy that truly fits your business.
Because the only thing better than a thriving business is a thriving business with a smart, efficient tax plan.