An S-corp election can save an owner thousands a year in self-employment tax. It can also cost more than it saves. The difference comes down to your profit, your salary and your state.

How the savings work

As a sole proprietor or single-member LLC, every dollar of profit is subject to roughly 15.3% self-employment tax. As an S-corp, you pay yourself a reasonable salary and take the rest as distributions, which are not subject to that tax.

Where the costs come in

You will run payroll, file a separate business return and pay for it. In some places, like New York City, an extra entity-level tax eats into the savings. Expect $2,000 to $4,000 a year in added cost.

A simple rule of thumb

If your profit is consistently above $80,000 and you can justify a salary well below that, the election usually pays for itself. Below $60,000, it rarely does. In between, run the numbers with your CPA.