3 Key Considerations Before Electing S-Corp Status for Your Small Business
Starting with an S-Corp status for your LLC can be a great way to save on taxes. While I recommend this to many business owners, it’s not always the best choice for everyone. There are three key factors to consider before making the decision.
Extra Costs to Maintain S-Corp Status
When your small business elects S-Corp status, you’re required to file an additional tax return called Form 1120-S. This means that on top of your personal tax return, you’ll need to file a separate one for your business. Filing this form using TurboTax in 2025 will cost you around $1,749. Considering that is the TurboTax pricing, that is the new minimum price you will pay. You also have to pay yourself a “reasonable salary” and run payroll for yourself. Services like Gusto cost about $46 per month to handle payroll.
With these extra costs—filing an additional tax return and paying for payroll—it’s important to think about whether the savings on taxes are worth the added expenses.
QBI Deduction - Qualified Business Income
After electing S-Corp status, not all of your business income will qualify for a QBI deduction. Let’s say your business earns $150,000, and you decide to pay yourself $50,000. Before electing S-Corp status, the full $150,000 would have been eligible for the QBI deduction. But after the election, only the remaining $100,000 can be used for the deduction. This means you lose out on a $10,000 deduction.
Will Your Income Stay the Same?
This is a big one for small business owners. Here’s an example: I worked with a business owner who made $130,000 a year during the pandemic, thanks to strong online sales. Fast forward two years later, and their business only brought in $70,000. When they were making $130,000, electing S-Corp status made sense because of the savings on payroll taxes. But now, with their income lower, maintaining S-Corp status costs more than the savings from payroll taxes.
So, when thinking about electing S-Corp status, it’s important to consider not just how much money you’re making now, but also how your revenue might change in the future.
S-Corporation status for a small business is a great way to save money on payroll taxes. Just be sure that you consider many different aspects that may impact the tax calculation.
Disclaimer: This is general information and should not be considered tax advice. If you have questions or need help deciding whether S-Corp status is right for your business, I’m here to help. Feel free to book a free consultation today, and we’ll work together to find the best solution for you.