S-Corps Explained: Tax Savings, Trade-Offs, and What No One Tells You

The S-Corp question is one of the most common Brian hears from entrepreneurs, but the answer is almost never as simple as the internet makes it sound. In this episode, Brian Thompson breaks down what an S-Corp actually is, how the potential tax savings work, and the real-world trade-offs that often get left out of the conversation. Whether you're considering the election for the first time or revisiting the decision, this episode gives you the context you need to make an informed choice.

What is an S-Corp?

First, an important clarification: an S-Corporation is not a business structure, it's a tax election. Your business might legally be an LLC or a partnership, but you elect to have the IRS tax it under Subchapter S of the tax code. That election allows business income to pass through to the owner's personal tax return rather than being taxed at the corporate level. The key difference for most small businesses comes down to how payroll and self-employment taxes are handled.

How Do S-Corps Save on Taxes?

When you run a business as a sole proprietor or single-member LLC, your net profits are generally subject to self-employment tax of 15.3%, which covers Social Security and Medicare. With an S-Corp election, you pay yourself a reasonable salary (which is subject to payroll taxes) but any profits above that salary can be taken as distributions, which are generally not subject to self-employment tax.

A straightforward example: on $200,000 in net profit, splitting it evenly between salary and distributions could save roughly $15,000 in payroll taxes. That's the number people are chasing when they talk about S-Corps.

S-Corps Trade-offs

The savings aren't guaranteed, and there are two major caveats. First, reasonable compensation. The IRS requires S-Corp owners who work in the business to pay themselves a reasonable salary before taking distributions. Reasonableness evaluation is based on your experience, role, time devoted to the business, and what comparable professionals earn. For service-based businesses where the owner is the primary revenue generator, this requirement can significantly limit how much income can realistically be treated as distributions.

Second, administrative costs. Running an S-Corp means running payroll for yourself, filing a separate S-Corp tax return, issuing a K-1, maintaining better corporate records, and typically paying more for accounting and tax preparation. For some businesses the extra steps are worth it. For others, the time and cost eat too much into the savings.

State and Local Tax Considerations for S-Corps

For many entrepreneurs, particularly those in cities where a large share of LGBTQ business owners live, state and local taxes add another layer of complexity. Brian breaks down the specifics: Illinois S-Corps pay a 1.5% personal replacement tax; California S-Corps pay 1.5% on net income with an $800 minimum franchise tax; New York State imposes a fixed dollar minimum tax based on gross receipts; and New York City doesn't recognize the federal S-Corp election at all, meaning city-level corporate taxes of up to 8.85% can still apply. Washington DC has its own franchise tax currently at 8.25%. If you operate in Chicago, LA, San Francisco, New York, or DC, these rules need to be part of your analysis.

The PTET Opportunity

Despite the complications, Brian is clear: he recommends S-Corps for many clients when the numbers make sense. And there's an additional tool worth knowing about — the pass-through entity tax, or PTET. Created in response to the federal SALT cap, which limited state and local tax deductions on individual returns to $10,000, the PTET election allows the business itself to pay state income tax at the entity level, where it can often be fully deductible for federal purposes. The SALT cap increased to $40,000 in 2025, which reduces the urgency of this workaround for some. But for higher income business owners, PTET can still create meaningful additional savings on top of the payroll tax benefits.

The Right Questions to Ask About S-Corps

Instead of asking "should I become an S-Corp?", Brian reframes the question: Does an S-Corp make sense for my business? The considerations that matter include what type of business you run, how much profit you actually generate, whether revenue is produced primarily by you or a broader team, your willingness to handle the administrative requirements, the state and city tax rules where you operate, and how the decision fits into your broader tax and retirement planning. You also don't have to decide on day one. Many entrepreneurs start under simple tax treatment and elect S-Corp status once the business becomes profitable enough for it to make sense.

Your Action Step

This week, take three steps: look at your most recent business profit, estimate what a reasonable salary might look like for your role, and have a conversation with your tax advisor or financial planner about whether the numbers actually work in your specific situation. Your tax strategy should support your business strategy, not the other way around. The S-Corp election can be a powerful tool for the right business, but like most things in tax planning, context is everything. If you have any questions about S-Corps, reach out to Brian to see what your options are.

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About Brian and the Mission Driven Business Podcast

Brian Thompson, JD/CFP®, is a tax attorney and Certified Financial Planner® who specializes in providing comprehensive financial planning to LGBTQ+ entrepreneurs who run mission-driven businesses. The Mission Driven Business podcast was born out of his passion for helping social entrepreneurs create businesses with purpose and profit.

On the podcast, Brian talks with diverse entrepreneurs and the people who support them. Listeners hear stories of experiences, strength, and hope and get practical advice to help them build businesses that might just change the world, too.