Entity strategy
When to Convert Your LLC to an S-Corp: The Income Threshold and the Timing
An S-corp election saves self-employment tax, but it adds payroll and compliance costs. Here's the net-profit level where the savings usually win, the self-employment tax math behind it, and the March 15 election deadline that decides your timing.
8 min read · Published May 2026
Key Takeaways
- The S-corp election saves self-employment tax: a default LLC pays 15.3% on all net profit, while an S-corp pays it only on the owner's W-2 salary. Profit taken as a distribution skips the 15.3%.
- The election starts to pay off around $60,000 to $80,000 of net profit, where the tax saved clears the roughly $2,000 to $4,000 a year in payroll, return prep, and added bookkeeping it costs to run an S-corp.
- Your salary has to be reasonable for the work you do. The savings come from the distribution portion, so an unreasonably low salary is the fastest way to draw an audit.
- Timing runs on March 15. To have S-corp status for the full current year, file Form 2553 by the 15th day of the third month. Miss it and there is late-election relief, but plan for the deadline rather than counting on the exception.
- In California the math is tighter. An S-corp owes the $800 minimum plus 1.5% of net income to the FTB, which eats into the federal savings, so the break-even sits a bit higher than it does in a no-income-tax state.
The one thing an S-corp changes
An S-corp election does not lower your income tax rate. What it changes is how much self-employment tax you owe. That single difference is the whole reason to consider it, so the decision comes down to whether the tax you save is bigger than the cost of running the S-corp.
A default single-member LLC is taxed as a sole proprietorship. You report the business on Schedule C, and every dollar of net profit is hit with self-employment tax at 15.3% (12.4% for Social Security up to the $184,500 wage base in 2026, plus 2.9% for Medicare on all of it). That is on top of regular income tax.
An S-corp splits your income into two buckets. You pay yourself a W-2 salary, which carries the same 15.3% in payroll tax. The rest of the profit comes out as a distribution, and a distribution is not subject to self-employment or payroll tax. The savings live in that second bucket.
The S-corp saves payroll tax on the profit you take as a distribution rather than salary. Everything about the “when” question is really asking how big that distribution bucket is.
The self-employment tax math
Self-employment tax applies to 92.35% of your net profit. For round numbers below the wage base, it works out close to 15.3% of profit. As an S-corp, that 15.3% applies only to your salary, so the profit above your salary escapes it.
So the savings are roughly 15.3% of (net profit minus reasonable salary), up to the $184,500 Social Security wage base. Above the wage base, only the 2.9% Medicare portion remains, so each additional dollar of distribution saves less.
The $7,650 is the gross self-employment tax saved by taking $50,000 as a distribution instead of salary. Subtract the roughly $3,000 it costs to run payroll and file the separate return, and the owner is ahead about $4,650. The salary of $70,000 has to be defensible for the work performed — that is the constraint the whole strategy hangs on.
Where the break-even sits
Because the cost of running an S-corp is mostly fixed, the election only wins once your distribution bucket is large enough to save more than that fixed cost. The table below assumes a reasonable salary roughly in line with each profit level and about $3,000 a year in added S-corp costs.
| Net profit | Assumed reasonable salary | Distribution | SE tax saved (≈15.3%) | Net of ~$3,000 cost |
|---|---|---|---|---|
| $50,000 | $42,000 | $8,000 | about $1,224 | negative — not worth it |
| $80,000 | $55,000 | $25,000 | about $3,825 | about $825 ahead |
| $100,000 | $65,000 | $35,000 | about $5,355 | about $2,355 ahead |
| $150,000 | $95,000 | $55,000 | about $8,415 | about $5,415 ahead |
At $50,000 of profit the distribution is too small to clear the cost, so an S-corp loses money. Somewhere around $60,000 to $80,000 the lines cross, and from there the benefit climbs with profit. These salary figures are illustrative. Your reasonable salary depends on your role, your industry, and what you would pay someone else to do your job, which is covered in the reasonable compensation article.
A low salary is the fastest way to an audit
California makes the threshold higher
In a state with no income tax, the federal self-employment savings are the whole story. In California they are not. A California S-corp owes the $800 minimum franchise tax plus 1.5% of net income to the Franchise Tax Board, where a default LLC owes the $800 minimum and a gross receipts fee that only starts at $250,000 of revenue.
That 1.5% is an added cost the federal savings have to overcome. On $120,000 of net income, the California S-corp franchise tax is $1,800, which trims the net benefit from the earlier example. The practical effect is that the break-even point sits a few thousand dollars of profit higher in California than it would elsewhere. The full state-by-state cost comparison is in the California LLC vs. S-corp true cost article, and you can model your own numbers with the California entity cost planner.
The timing: March 15 decides your year
Once the income math points to yes, timing is the next question, and it runs on a fixed date. To have S-corp status for the full current tax year, file Form 2553 by the 15th day of the third month of that year. For a calendar-year business, that is March 15.
- Existing business, calendar year: file Form 2553 by March 15 to be an S-corp for all of the current year. File after that and the election generally takes effect the following year.
- Brand-new entity: you have two months and 15 days from the date the entity starts business to elect for that first year.
- Missed the deadline: the IRS grants late-election relief under Rev. Proc. 2013-30 when you have reasonable cause and have otherwise operated as an S-corp. It works, but it is discretionary, so treat it as a backstop, not a plan.
You keep the LLC
So, when?
Convert when three things are true: your net profit is reliably above roughly $60,000 to $80,000, your profit is enough above a reasonable salary to create a meaningful distribution, and you are ready to run payroll and file a second return every year. If your profit is lumpy or you are still in a low-income build year, staying a default LLC keeps things simple and costs you nothing. The election will still be there the year the numbers turn.
The cleanest move is to project this year’s profit before March 15 and decide for the current year while you still can. If you are close to the line, the LLC vs. S-corp comparison walks through the full trade-off, and a quick projection of your numbers will tell you whether this is the year.
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In California, the S-corp pays 1.5% franchise tax on net income instead of the flat $800 LLC fee. Here's when the S-corp still wins — and when it doesn't.
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Sources & References
- IRS — Self-Employment Tax (Social Security and Medicare taxes), 15.3% rate and 92.35% base
- SSA — 2026 Social Security wage base ($184,500)
- IRS — About Form 2553, Election by a Small Business Corporation (March 15 timing, two-months-and-15-days rule)
- IRS — Instructions for Form 2553 (late election relief under Rev. Proc. 2013-30)
- CA FTB — S corporations ($800 minimum franchise tax plus 1.5% on net income)
Frequently asked
Questions owners actually ask
- At what income does an S-corp make sense?
- As a rule of thumb, when your business nets more than about $60,000 to $80,000 in profit and that profit is reliable year to year. Below that, the self-employment tax you save on the distribution portion usually does not clear the $2,000 to $4,000 a year it costs to run payroll, file a separate return, and keep cleaner books. Above it, the savings grow with every dollar of profit above a reasonable salary. The exact break-even depends on your reasonable salary and your state, so run your own numbers before electing.
- How much self-employment tax does an S-corp actually save?
- Roughly 15.3% of the profit you take as a distribution instead of salary, up to the Social Security wage base of $184,500 for 2026. If your business nets $120,000 and a reasonable salary for your role is $70,000, the other $50,000 can come out as a distribution that avoids the 15.3%. That is about $7,650 saved before you subtract the cost of running the S-corp. Past the wage base, only the 2.9% Medicare portion is in play, so the savings per dollar shrink.
- What does it cost to run an S-corp each year?
- Plan on a payroll service to run your salary and file payroll returns (often $500 to $1,500 a year), a separate Form 1120-S corporate return on top of your personal return (added CPA fees, often $1,000 to $2,500), and tighter bookkeeping to keep the entity clean. All in, most small S-corps spend $2,000 to $4,000 a year more than they would as a default LLC. That cost is fixed, which is why low-profit businesses do not come out ahead.
- What is the deadline to elect S-corp status?
- File Form 2553 by the 15th day of the third month of the tax year you want the election to take effect. For a calendar-year business, that is March 15. A brand-new entity has two months and 15 days from the date it starts business to elect for that first year. If you miss the window, the IRS offers late-election relief under Rev. Proc. 2013-30 when you have a reasonable cause and have otherwise acted as an S-corp, but relief is discretionary, so do not build a plan around it.
- Can I elect S-corp status in the middle of the year?
- You elect for a tax year, not a partial year. If you file by the March 15 deadline, the election covers the entire current year. If you form a new entity mid-year, you have two months and 15 days from when it begins business to elect for the rest of that year. You cannot flip an existing LLC to S-corp status as of, say, July 1 and leave the first half as a sole proprietorship. It is the whole tax year or the next one.
- Do I keep my LLC if I elect S-corp status?
- Yes. An S-corp is a tax election, not a legal entity. Your LLC stays your LLC for legal and liability purposes; you are just asking the IRS to tax it as an S-corporation. You do not have to dissolve the LLC or refile with the state. You file Form 2553, start running payroll, and file Form 1120-S instead of reporting the business on your personal Schedule C.
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Educational content only. This article is for informational purposes and does not constitute tax, legal, or financial advice. Every situation is different — consult a qualified professional before acting on anything here.