Should I Elect S Corp Status in 2026?

Many small business owners hear that an S Corp is a guaranteed tax saver. Friends swear by it. Online posts oversimplify it. Payroll providers encourage it. The truth is more nuanced. An S Corp can reduce taxes in the right situations, but it can also add cost and complexity if used incorrectly. This guide clears up common myths and gives you a practical framework for deciding whether an S Corp fits your business.

An S Corp Always Reduces Taxes

Tax savings depend on profit levels. As a sole proprietor, all profit is subject to self-employment tax. With an S Corp, you pay yourself a salary that is subject to payroll tax, and remaining profit can be distributed without payroll tax.

If your profit is low, the required salary can take up most of your income, leaving little to distribute. In those situations, savings are limited and administrative costs may outweigh benefits.

You Can Choose Any Salary You Want

The IRS requires owner-employees to take reasonable compensation. Reasonable means what you would pay someone else to do the same job. If the salary is too low, the IRS can reclassify distributions as wages and assess taxes and penalties. The tax planning opportunity comes from balancing salary and distributions, not underpaying yourself.

An S Corp Eliminates Self-Employment Tax

S Corps do not eliminate payroll taxes. They simply limit payroll tax to the salary portion. Distributions above that salary are not subject to Social Security and Medicare tax.

Example: A business earns $120,000. A sole proprietor pays self-employment tax on the full amount. In an S Corp, if the reasonable salary is $80,000, only that amount is subject to payroll taxes. The remaining $40,000 can be distributed without payroll tax.

An S Corp Provides Liability Protection

S Corp status is a tax election. It does not create legal protection. Liability protection comes from your entity type, such as an LLC. Many businesses operate as an LLC taxed as an S Corp.

S Corps Are Simple and Cheap to Run

An S Corp requires payroll, clean bookkeeping, a separate tax return, officer compensation documentation, and state filings. Costs include payroll service fees, bookkeeping, tax preparation, and state fees. These costs can exceed any tax benefit for smaller or inconsistent businesses.

Key Eligibility Rules Most Owners Miss

S Corps have restrictions, including:


• No more than one hundred shareholders.
• Shareholders must be individuals, certain trusts, or estates, and must be citizens or resident aliens.
• Only one class of stock is allowed.
• Distributions must follow ownership percentages.

Violating these rules can terminate the election.

Timing Matters

Election deadline:


• Two months and fifteen days after the start of the year you want it to apply.

Late election relief is sometimes available but not guaranteed. Mid-year elections create extra filings.

Simple Numerical Example

Assume 100,000 net profit before owner pay.

Sole Proprietor:


• Entire 100,000 subject to self-employment tax.

S Corp:


• Reasonable salary of 60,000.
• Payroll taxes apply to the 60,000.
• The remaining 40,000 can be distributed without payroll tax.

After payroll and compliance costs, the savings can still be meaningful if profits are strong.

When an S Corp Makes Sense

An S Corp may be a good fit if:


• You consistently earn enough profit to pay yourself a reasonable salary and still have money left to distribute.
• Income is stable throughout the year.
• You can handle added compliance or outsource it.
• Expected savings exceed the cost of operating as an S Corp.

It is usually not ideal for low-profit, inconsistent profit, or part-time businesses.

What to Gather Before Talking With a CPA

• Prior year tax return.
• Year-to-date financials.
• Expected profit.
• A rough idea of reasonable compensation.
• Your state tax requirements.

This helps a CPA perform an accurate S Corp analysis.

An S Corp can reduce payroll taxes and create structure for how you pay yourself, but only when the numbers support it. It is not a universal solution. Income level, compliance readiness, and reasonable salary requirements determine whether it makes sense.

If you are considering an S Corp election, speak with a qualified CPA who can review your financials and help you make a confident decision.