Freelancer2 min read
The S-corp breakeven: where the election starts paying
The election is the largest tax lever available to a profitable service business, and the most commonly made too early. The saving is real; so is the payroll obligation it creates in the year revenue drops.
Published
As a sole proprietor or single-member LLC you pay self-employment tax on your net earnings. For 2026 that is 15.3% in total — 12.4% Social Security on earnings up to $184,500, plus 2.9% Medicare with no ceiling — applied to 92.35% of net earnings, with an additional 0.9% Medicare surcharge above $200,000 for a single filer.
Elect S-corp status and the profit splits: a salary, which bears employment taxes, and a distribution, which does not. The saving is roughly 15.3% of whatever sits in the distribution — until the salary passes the Social Security wage base, after which only the Medicare portion is in play.
The arithmetic
| Net profit | Plausible salary | Distribution | Gross saving | After ~$2,000–$3,500 of payroll and filing costs |
|---|---|---|---|---|
| $60,000 | $45,000 | $15,000 | ~$2,300 | Roughly a wash |
| $90,000 | $60,000 | $30,000 | ~$4,600 | Worth doing |
| $150,000 | $95,000 | $55,000 | ~$8,400 | Clearly worth doing |
| $250,000 | $140,000 | $110,000 | ~$8,000 — above the wage base only Medicare applies | Worth doing; the curve flattens |
| $400,000 | $180,000 | $220,000 | Medicare only on the distribution | Still worth it, but the marginal benefit is much smaller |
Reasonable compensation is the whole constraint
The saving comes entirely from how much profit you can defensibly treat as a distribution. The salary must be reasonable for the work performed — what someone would have to be paid to do your job. This is litigated, and courts have recharacterised distributions as wages where the salary was implausible.
- Benchmark against real data — industry salary surveys for your role, region and experience.
- Document the reasoning once, and keep it. A written rationale is far better than a number nobody can explain.
- Adjust it as the business grows. A salary set at the first year's level and never revisited looks exactly like what it is.
- Be more conservative if most of the profit comes from your personal labour rather than from staff or capital.
The costs on the other side
- Payroll. A provider, filings, and quarterly and annual returns.
- A separate corporate tax return, and an accountant who prepares it.
- State-level costs. Some states impose a franchise tax, a minimum fee, or tax S-corp income at entity level.
- Rigidity. Payroll continues whether or not the revenue does. Reversing an election is possible but has consequences and waiting periods.
- A lower Social Security earnings record, which reduces your eventual benefit. A distant cost, but a real one.
The rule of thumb
Model it at $80,000–$90,000 of net profit, elect when it is durably above that, and weight durability heavily. Electing on one exceptional year and then spending three years running payroll for a business that has shrunk is a common and avoidable mistake.
And if you are not a US person, none of this is available — Section 1361 bars non-resident alien shareholders from holding S-corporation stock.
Model it before you elect
Founders 8 keeps the entity and the filings in order; the election is a conversation to have with numbers in front of you.
Build your workspaceThis is one section of the freelancer structure guide, which covers the entity choice itself.
Founders 8 does not provide tax advice. Tax residency depends on facts and rules specific to each jurisdiction — review your position with a qualified adviser.