When to make the S-corp election, in one honest chart.
The tax savings are real. So is the paperwork. The crossover point isn't where the internet says it is.
The rough rule that gets thrown around: elect S-corp when your net business income clears $40K. The rule I actually use with clients: closer to $70K, and only if you're willing to run real payroll.
Below $70K, the payroll costs (state filing fees, payroll software, extra CPA hours, unemployment tax) tend to eat most of the savings. Above $70K, the numbers pull ahead — and by $150K they're substantial.
The catch: the IRS wants you to pay yourself a 'reasonable salary' before you take distributions. Reasonable is whatever a comparable employee would earn doing your work. If you're paying yourself $20K and taking $180K in distributions, you are going to lose that audit.
The other catch: S-corp income doesn't count toward Social Security beyond the salary line. Save more aggressively toward retirement, or you're just moving future income around.