🦃 Coming to you early this week — Happy Thanksgiving!
THE PERMANENT TAX SAVINGS MOST BUSINESS OWNERS MISS
A physical therapist walked into my office last year making $200,000 in revenue.
Great business. Profitable. Growing.
She was structured as a sole proprietor.
That single decision was costing her $19,000 every year in avoidable self-employment taxes.
We restructured her as an S-Corp. Set a reasonable salary of $60,000 based on what employed physical therapists earn in her market. The remaining $140,000 became distributions — still taxed as ordinary income, but free from self-employment and Additional Medicare taxes.
She now saves $19,000 per year. Every single year. For as long as she runs the business.
That's not a deduction that expires. That's permanent structural savings.
Here's the thing about entity structure: you get one shot to set it up right each year.
If you're in the wrong structure for 2025, you're stuck with it. We can fix it for 2026 — but every month you wait costs you real money.
Why This Is The Highest Return on Hassle Decision You'll Make
Return on Hassle is simple: benefits divided by the pain it takes to get there.
Most tax strategies require ongoing maintenance. Quarterly estimates. Annual calculations. Constant decisions.
Entity structure? You set it up once. File the right forms. Then you save money every single year without thinking about it.
The hassle is front-loaded. The benefit is permanent.
A consultant making $150,000 who switches from sole proprietor to S-Corp:
- One-time hassle: Form the LLC, elect S-Corp status with the IRS via Form 2553, set up payroll
- Permanent benefit: $14,000+ in annual tax savings
That's a 14:1 return on hassle in year one. Infinite ROH every year after.
Compare that to chasing credit card points or optimizing meal deductions. Those strategies require constant attention for marginal gains.
This is the foundation. Everything else builds on it.
Calculate YOUR Entity Structure Savings
The math is straightforward.
If you're a sole proprietor or default LLC:
Every dollar of net profit gets hit with 15.3% self-employment tax (you can deduct half, bringing the effective rate to around 14%).
$150,000 net profit = $21,200 in self-employment tax.
As an S-Corp:
You split income into salary (subject to payroll taxes) and distributions (pass through to your personal return as ordinary income, but free from self-employment and Additional Medicare taxes).
$150,000 net profit with $43,000 salary:
- Salary: $43,000 (pays self-employment tax)
- Distributions: $107,000 (escapes self-employment tax)
- SE tax on salary: $6,600
- Your annual savings: $14,600
That's $1,200 per month you're leaving on the table.
Over 5 years? $73,000.
Over 10 years? $146,000.
And that's not counting what that money could do invested or reinvested in your business.
Two Salary Concepts Every S-Corp Owner Must Understand
Level 1: Reasonable Compensation
This applies to every S-Corp owner from day one.
The IRS requires you to pay yourself a "reasonable salary" based on what the market pays for comparable work. This isn't a formula—it's based on:
- What employed professionals in your role earn in your geographic area
- Your training, experience, and credentials
- The duties you actually perform
- Industry standards
A physical therapist running a solo practice might have a reasonable salary of $60,000-$80,000 based on what employed PTs earn locally. A software consultant might be $120,000-$150,000. A marketing freelancer might be $50,000-$70,000.
The IRS audits S-Corps specifically for unreasonably low salaries. If you're making $400,000 and paying yourself $30,000, you're asking for trouble. Work with your CPA to set a defensible number based on market data.
Level 2: QBI Optimization (For Higher Earners)
Once your taxable income exceeds $383,900 (married filing jointly) or $191,950 (single) in 2024, a different calculation enters the picture.
The Section 199A Qualified Business Income deduction allows a 20% deduction on qualified business income—but for high earners, that deduction is limited by W-2 wages paid.
The optimization formula: add back all W-2 wages to net income, multiply by 2/7. That's the target for total wages paid by the business.
This is where S-Corp salary strategy shifts from "reasonable compensation" to "QBI maximization."
But here's the catch: if you run a Specified Service Trade or Business (SSTB), the QBI deduction phases out entirely above those thresholds.
What's an SSTB?
The IRS specifically calls out: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business where the principal asset is the reputation or skill of employees or owners.
If you're a doctor, lawyer, accountant, financial advisor, or similar professional — and your income exceeds the phase-out threshold — you may not get QBI at all.
This changes the entity structure calculus. Your CPA should model both scenarios.
The Three Structures (And When Each Makes Sense)
Sole Proprietorship
The default structure. You report everything on Schedule C attached to your personal return.
Best for: Side hustles under $30,000 in net profit, testing a business idea, minimal liability exposure.
The problem: Full self-employment tax on every dollar of profit. Zero liability protection.
My take: This is fine when you're getting started. But it's a temporary structure. Once you hit $30,000-$40,000 in net profit, it's time to evaluate your options.
LLC (Limited Liability Company)
Separates personal and business assets. Protects you from lawsuits and business debts.
By default, a single-member LLC is taxed exactly like a sole proprietorship—still paying full self-employment tax on all profits.
Best for: Businesses with $30K-$60K in profit, high-liability operations (contractors, pest control, anything with physical risk), real estate holdings.
My take: The LLC is the middle ground. You get liability protection without corporate complexity. But by itself, it doesn't save you taxes. The magic happens when you elect S-Corp taxation for your LLC.
S-Corporation (The Tax Savings Machine)
S-Corp isn't a separate legal entity—it's a tax election you make for your LLC or corporation. You file Form 2553 with the IRS to make this election.
This is where business owners making $60,000+ in net profit should be.
How it works:
Pay yourself a reasonable salary via W-2 payroll based on market rates for your role. That salary pays payroll taxes.
Everything above your salary becomes distributions—which pass through to your personal return as ordinary income but escape self-employment and Additional Medicare taxes.
Requirements:
- Domestic corporation only
- Max 100 shareholders (individuals, certain trusts, estates—no LLCs or partnerships as shareholders)
- One class of stock
- Must run payroll
- More compliance (quarterly payroll taxes, annual Form 1120-S)
The threshold: As a general guideline, S-Corp makes sense at $60,000-$80,000+ in net profit annually. Below that, compliance costs eat your savings. Above that, savings scale—and compliance becomes a rounding error.
The Year-End Deadline Nobody Talks About
The S-Corp election deadline is March 15, 2026 for calendar-year businesses (or 2 months and 15 days from formation for new entities). File Form 2553 with the IRS by that date, and you're an S-Corp for all of 2026.
Miss that deadline? Late election relief exists, but it requires reasonable cause documentation and IRS approval—adding complexity and uncertainty to a decision that should be straightforward.
Here's why December matters:
If you want to get this handled correctly—verify your structure makes sense, determine your optimal salary based on market data, set up payroll, file the right forms—you need time.
Trying to figure this out in February is too late. Tax season is in full swing, CPAs are slammed, you're rushing a decision that should be strategic, and the opportunity to pay yourself a salary has passed.
November and December are when smart business owners lock this in.
If you're making $100,000+ in net profit and you're not structured as an S-Corp, you're losing $1,000-$2,000 every single month.
That's the cost of waiting.
Three Expensive Mistakes
1. Paying yourself the wrong salary
Too low? IRS audit. Too high? You defeat the purpose.
The IRS looks at comparable salaries for your role, your duties, your experience, and your geography. "I'll just pay myself $20,000" doesn't fly when market rate for your work is $80,000.
Work with your CPA to set a defensible salary backed by market data.
2. Missing state-level elections
Some states require separate S-Corp elections beyond federal Form 2553.
California charges S-Corps the greater of $800 minimum OR 1.5% of net income. On $300,000 profit, that's $4,500 to California on top of federal taxes.
New York and New Jersey require state-specific forms (CT-6 and CBT-2553). Miss those? You're taxed as a C-Corp at the state level while being taxed as an S-Corp federally.
Meanwhile, Texas and Florida S-Corps pay $0 in state-level entity tax. Geography matters.
Work with someone who knows your state's rules.
3. Waiting too long to make the switch
Every year you delay is money you can't get back.
Making $150,000 as a sole prop when you should be an S-Corp? That's $15,000+ gone. Per year.
Five years of waiting? $75,000+ you left on the table.
Here's What You Should Do Right Now
If you're making under $60,000 in net profit:
Stay sole prop or form an LLC for liability protection. Focus on growing revenue first.
If you're making $60,000-$100,000:
S-Corp election should be on your radar. The tax savings ($8,500-$14,000 annually) begin to exceed the compliance costs.
Get this evaluated before year-end so you're set up for 2026.
If you're making $100,000+:
If you're not already an S-Corp, you're leaving $14,000-$28,000+ on the table every year.
This should be your top priority before December 31st.
If you're structured wrong right now:
You can't fix 2025. But you can fix 2026 — if you act now.
This Is The Foundation
Entity structure determines everything else:
- How much self-employment tax you pay (or avoid)
- Whether you qualify for the 20% QBI deduction—and how much
- What retirement strategies are available to you
- How you handle quarterly estimates
- Whether advanced strategies even make sense
You can't optimize salary, retirement planning, or quarterly estimates until your entity structure is right.
That's why this is email #1 in this series.
Get the foundation right, and everything else falls into place.
Get it wrong, and you spend the next decade overpaying while more sophisticated strategies sit out of reach.
Your Next Step
If you're making $60,000+ in net profit and you're not certain your entity structure is optimized, book a consultation before year-end.
Schedule with Better Bookkeeping, and we'll walk through:
- How much you're overpaying right now
- Whether S-Corp makes sense for your specific business, industry, and state
- Your optimal salary structure based on market rates for your role
- What forms to file and when
- How to implement correctly to avoid IRS scrutiny
- Your complete 2026 game plan locked in before year-end
If you want this handled before year-end planning season closes, move now.
The cost of waiting is $1,000-$2,000+ per month in unnecessary taxes.
Book here.