Guide · S corporations
Is an S Corp Worth It? A Studio Owner’s Break-Even Math
For the owner in our illustration, an S corp is worth it only above about $60,000 of profit. At $40,000 to $100,000 of profit it saves $1,852 to $3,453 of tax a year, but payroll and a second return add $2,448 a year to the accounting bill. Below about $60,000 of profit, the S-corp costs this owner more than it saves.
- CPA led
- Licensed CPA firm in Colorado
- Month to month
- Your books in your own QuickBooks
- Remote, nationwide
An example: a studio owner who elected S corp status
A music studio owner elected S-corp status years ago because someone said it saves tax. It does save some. Whether it saves more than it costs depends on one number: profit.
This owner is an illustrative composite built from round numbers, not a real client. The assumptions are listed further down the page.
Tax an S-corp saves this owner a year, at $40,000 to $100,000 of profit
What running payroll and a second return adds to the accounting bill a year
Profit where the two roughly cancel out
S corp vs sole proprietor taxes
S corp vs sole proprietor taxes: where the saving comes from
As a sole proprietor, the owner pays 15.3% self-employment tax on nearly all of the profit. As an S-corp, the owner takes a reasonable salary through payroll, pays Social Security and Medicare on that, and takes the rest as distributions that do not carry those taxes.
The saving is smaller than people expect, because three things work against it: the 20% business deduction shrinks, because salary does not count toward it; payroll brings unemployment insurance and, in Colorado, the FAMLI premium; and the business now needs its own return and payroll every month.
S corp break even
S corp break even: the math at four profit levels
| Profit before owner’s salary | Taxes as a sole proprietor | Taxes and payroll costs as an S-corp | S-corp saves | After the extra accounting cost |
|---|---|---|---|---|
| $40,000 | $8,224 | $6,372 | $1,852 | -$596 |
| $60,000 | $13,489 | $10,799 | $2,690 | $242 |
| $80,000 | $18,753 | $15,727 | $3,026 | $578 |
| $100,000 | $25,345 | $21,892 | $3,453 | $1,005 |
Below about $60,000 of profit, the S-corp costs this owner more than it saves. Between $60,000 and $100,000 it comes out a few hundred to about a thousand dollars ahead. The case gets stronger above that, and weaker if the salary has to be higher than half of profit.
The extra accounting cost is the difference between our two small business tiers. Company is $299 a month, plus QuickBooks and payroll at Intuit’s prices (about $102). Solo is $159 a month, plus QuickBooks Simple Start at Intuit’s price ($38). The difference comes to $2,448 a year, for running payroll and the S corporation’s own return.
Making the election
Form 2553 and the deadline that catches people
An S corporation is a tax election, not an entity type. You keep your LLC or corporation and file Form 2553, Election by a Small Business Corporation, signed by every shareholder.
The timing rule is the part that costs people a year. To have the election apply to the current tax year, Form 2553 generally has to be filed by the 15th day of the third month of that year, which is March 15 for a calendar-year business. File after that and the election normally takes effect the following January instead, though late election relief exists under IRS procedures when there was reasonable cause.
The practical consequence: if your profit crossed the threshold in June, you are usually electing for next year, not this one. That is worth knowing in June rather than in March.
Where the break-even actually sits
As a rule of thumb for 2026, the election starts paying for itself somewhere around $60,000 to $80,000 of net business income. Below that, the payroll cost, the extra return and the administrative load usually eat the self-employment tax saving. The numbers above show how that plays out at four different profit levels, and your own break-even depends on what a reasonable salary looks like in your field.
What changes the day after you elect
- You have to run payroll for yourself and file Form 941 each quarter
- You file a separate business return, Form 1120-S, with a K-1 to each owner
- Distributions have no withholding, so quarterly estimated payments usually still apply
- Reasonable compensation becomes an annual judgment the IRS can test
Setting up the election and payroll together is a $350 one-time item on our pricing page, and the Company plan at $299 a month covers the payroll accounting, the 1120-S and an owner’s 1040 afterwards.
When does an S corp make sense
When does an S corp make sense?
When profit is comfortably above the break-even point and the salary your work requires leaves real room for distributions. For this owner that point is about $60,000 of profit, at a salary of half of profit.
What we tell every S-corp owner. We run this check every year before year-end, with your real numbers, and we will tell you when it stops paying. Getting out is not free either: ending an S-corp can be treated as selling its assets to you, so an instrument, vehicle or equipment in the company can bring a tax bill. That is a reason to check early, not to stay by default.
Reasonable salary
Reasonable salary for an S corp owner
The salary has to be reasonable for the work you do. The IRS has won cases where owners paid themselves too little. Its guidance on S corporation compensation says distributions and other payments to a corporate officer must be treated as wages to the extent they are reasonable compensation for services, and it lists factors courts look at, including training and experience, duties, time devoted to the business, and what comparable businesses pay for similar services.
Salary also matters for the 20% deduction. The IRS says amounts received as reasonable compensation from an S corporation are not qualified business income, which is why a higher salary shrinks the deduction and the saving together.
Other factors
Other things that decide it
- The election does not change your liability protection. Your LLC does that either way.
- Your state matters. Some states charge S-corps a minimum tax; California’s is $800 a year.
Company · for S corporations and partnerships
Books, payroll, both returns and the yearly check, with a CPA
Company
$299 a month, plus QuickBooks and payroll at Intuit’s prices (about $102)
- Your books kept monthly in your own QuickBooks
- Payroll accounting and a yearly reasonable-salary review
- The 1120-S or 1065 and one owner’s 1040, one state each, signed by a named CPA
- The S-corp check every year, with a straight answer
- Month to month. Cancel online.
A named CPA reviews your books and signs your returns. Details are on our small business prices and tax return prices pages, and our small business tax planning page covers the rest of what we do.
Assumptions. Single owner, single filer, no other income, tax year 2025. Salary set at half of profit before salary. Payroll taxes 15.3% on salary; Colorado FAMLI premium: the 0.45% employee share only, since employers with fewer than ten employees do not owe the employer share; state unemployment $350 and federal unemployment $42 a year. Payroll software is inside the Company tier and not counted twice. Federal standard deduction $15,750 and 2025 brackets; qualified business income deduction 20%; Colorado 4.4%. The extra accounting cost is the difference between M2’s Company tier (about $401 a month with Intuit) and Solo (about $197), $2,448 a year.
This is an illustration built from round numbers, not a client’s return and not advice for your situation. Your results depend on your income, deductions, state and filing status. M2 CPA, LLC is a licensed CPA firm in Colorado; Alex Mungov, CPA.
Questions
Frequently asked
Is an S corp worth it?
For the owner in our illustration, only above about $60,000 of profit. Below that, the tax saved is smaller than the extra $2,448 a year for payroll and a second return. For you it depends on your profit, the salary your work requires, and your state.
What is the S corp break-even point?
In our illustration, about $60,000 of profit, where the S corp saves $2,690 of tax and the extra accounting cost is $2,448. It is not a universal number. A higher required salary, higher accounting fees or a state minimum tax push it up.
How much salary does an S corp owner have to pay?
Enough to be reasonable compensation for the work you do. The IRS says payments to a corporate officer must be treated as wages to the extent they are reasonable compensation, and courts weigh factors such as duties, time devoted and what comparable businesses pay. Our example assumes half of profit.
Does an S corp lower self-employment tax?
It changes which part of profit carries Social Security and Medicare. A sole proprietor pays 15.3% self-employment tax on 92.35% of profit. An S corp owner pays payroll taxes on salary only. But the IRS excludes reasonable compensation from qualified business income, so the 20% deduction shrinks.
Can I get out of an S corp if it stops paying?
Yes, but it is not free. Ending an S-corp can be treated as selling its assets to you, so an instrument, vehicle or equipment in the company can bring a tax bill. That is why we run the check every year before year-end.
Does California charge S corps a minimum tax?
Yes. The Franchise Tax Board taxes S corporations with California source income at 1.5%, with an $800 minimum franchise tax due whether the company is active, inactive or operates at a loss. It waives the minimum on the first-year return of a newly formed or qualified S corporation.
More
Related guides and prices
The 1099 threshold is $2,000 for 2026
Higher threshold, but the same law put cash tips, an occupation code and overtime on the form. File fewer 1099s and your tipped workers lose their deduction.
QuickBooks cleanup and catch-up
Months behind, or a file that no longer reconciles. A $500 diagnostic gives you a written scope and a fixed cleanup quote, credited in full against the cleanup. Most cleanups land between $1,200 and $3,900.
The FICA tip credit now covers salons, barbershops and spas
Section 45B was a restaurant provision for thirty years. For tax years beginning after 2024 it also covers barbering, nail care, esthetics and spa treatments, and it is worth 7.65 percent of qualifying employee tips. It is worth nothing on booth renters.
Can AI replace your accountant?
What automation genuinely does well, where it fails, and why balanced books are not the same as correct books.
Reasonable compensation for an S corp owner
No safe harbor, no 60/40 rule. What the IRS weighs, what reclassification costs, and how to set a number you can defend.
Your accountant stopped answering. What now?
The one message to send first, the records to collect before you leave, and how to switch without missing a deadline.
What online bookkeeping actually costs in 2026
Pilot, Bookkeeper360 and 1-800Accountant compared on published prices, plus what the monthly fee leaves out.
First year self-employed taxes
What a first year on a 1099 costs, quarterly estimates, and a Colorado sales tax trap.
Small business tax planning
Entity choice, reasonable salary and planning before year-end, not just filing.
Small business prices
Solo and Company tiers, with QuickBooks and payroll at Intuit’s prices shown separately.
Alexander Mungov, CPA
Founder and principal, M2 CPA
Alexander Mungov is a CPA and the founder of M2 CPA. Before the firm he spent twelve years auditing for the Defense Contract Audit Agency and two years running government compliance inside a defense technology company.
Alongside its government contract work, the firm handles monthly accounting and business and owner tax returns for owner-run companies. More about Alex.
Who does the work, and who signs it
Every close and every return is reviewed and signed by a licensed US CPA. Not a bookkeeper, not an account manager, not a rotating team. One licensed person is accountable for the result and you can look the license up yourself.
A named CPA signs
Alexander Mungov, CPA, Colorado license CPA.0030131. Verify it any time through the Colorado DORA license lookup.
A fixed fee, in writing
You get the number before any work starts. It does not change unless the scope does. No hourly surprise at the end.
Your books stay yours
Everything is kept in your own QuickBooks, under your login. If you leave, you take all of it, because it was always yours.
Want the S corp check on your own numbers?
Send us last year’s return and this year’s profit so far. We will tell you whether the S corp is paying for itself, and what the salary should be.