Many military members and Veterans are venturing into business ownership these days. In fact, 5.5% of business owners in the U.S. were Veterans in 2024. With business ownership comes a host of important and complex decisions. One of which is what entity type to select.
Most businesses start as Limited Liability Companies (LLCs). As the business grows in employee headcount and revenue, it is important to re-assess your entity structure to ensure that it aligns with your personal and business goals. One of those decisions that a successful LLC owner may come up against is the decision to make an S Corporation (or “S Corp”) election.
The goal of this article is to demystify S Corp elections and empower business owners to make informed decisions about the direction of their business.
Why Should You Care About S Corp Elections?
The main reason behind making an S Corporation election is to lower your tax bill. Specifically, we are talking about self-employment taxes. The self employment taxes consist of a 12.4% social security tax up to the first $176,100 in profit in 2025 and a 2.9% Medicare tax on all income. This amounts to a 15.3% tax on the first $176,100 in profit. These profits are also subject to Federal and State tax, so the total tax bill can add up quickly.
Many business owners are confused about exactly when it makes the most sense to elect S Corporation status. Choosing the right time to make this election can save or cost thousands or tens of thousands of income tax.
What Is an S Corp Election?
An S Corp election is a tax status that lets your business profits flow directly to your personal tax return, avoiding double taxation. To be eligible for an S Corporation, you must be U.S. based, have fewer than 100 shareholders, and have a single class of stock.
How this works is you pay yourself a reasonable salary on payroll, and then the excess profit flows to your return to be taxed at Federal and State levels, bypassing any self employment taxes.
For example, if a business owner has a profit of $100,000, the self employment tax on a simple single member LLC will be $15,300. However, if that business owner elects S Corporation status and pays themselves a reasonable salary of $50,000, the self employment taxes will be $7,650, which would save the business owner $7,650 in tax.
Who Should Consider an S Corp Election?
An S Corporation election is going to be most beneficial for small business owners that make a significant profit, usually defined as $50,000 to $100,000 and higher. It is not going to be best for those who have a side gig that may make profit one year and not the next, or for those with more complex ownership structures that require several different classes of stock and might be better suited by a C Corporation.
How to Make an S Corp Election
Here are the steps to file an S Corporation Election:
- File IRS Form 2553 by March 15 or within 75 days of forming your business.
- Set up payroll to pay yourself a reasonable salary. The definition of “reasonable salary” is not well defined by the IRS but should be reasonable if you were to get audited.
- Update your bookkeeping, tax, and payroll practices. This includes keeping tight bookkeeping in a software like QuickBooks, filing an S Corporation return, and running payroll. This will all increase your administrative costs from a few hundred to few thousand dollars per year.
With these changes, you can expect more administrative burden, cost, and compliance concerns around paying yourself a reasonable salary. The S Corporation structure is certainly more complex than a simple Sole Proprietor, but the payoff can be well worth it in the right situation.
How Will This Benefit Your Business?
The primary benefit of making an S Corporation Election is lower self employment, otherwise known as payroll taxes. As discussed at the top of the article, this happens by lowering the amount of income coming to you in wages which is double taxed by both halves of the 6.2% Social Security tax and 1.45% Medicare tax for a total tax’s of 15.3% on the wage base of $176,100 in 2025. So instead of your entire pay being subject to payroll taxes, only the amount paid to you as a reasonable salary will be taxed at that 15.3% rate. The rest will come to you as an owner’s distribution to be taxed solely at your federal and state income tax rates.
Common Mistakes and How to Avoid Them
Making an S Corporation election is not without risk and mistakes, but with some planning and foresight you should be able to avoid these. The main mistake would be paying yourself an unreasonably low salary, thereby minimizing the percentage of your income that is subject to Social Security and Medicare taxes. If the IRS finds this in an audit and can be extremely costly in penalties.
Another mistake would be choosing S Corp status before your business is consistently profitable. If your business turns extraordinarily little in profit or even loses money, you will not be able to reap the benefits of taking owner’s distributions as your entire profit will go to paying your salary or paying business expenses. This results in you unnecessarily paying hundreds to thousands of dollars in payroll, tax preparation, and compliance costs.
Avoiding these mistakes is completely attainable. Here are three simple steps you can take:
- Consult a financial advisor and/or trusted tax preparer.
- Use professional payroll software to handle compliance.
- Get a reasonable compensation study completed.
Conclusion
Making an S Corporation election can be extremely beneficial for military and veteran business owners. The main benefit is saving on payroll taxes by paying yourself a reasonable salary and then taking the rest as an owner’s distribution. You have to be careful to set a reasonable salary, setup a proper payroll system, and hire a tax preparer to file your S Corporation business return.
Ready to explore whether an S Corp election is right for you? Contact a trusted Military Financial Advisor’s Association member to map out a tax-saving plan that fits your business and personal goals.
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