Business Owners: Is it Time for an S-Corp?
Success has a way of complicating the very things it was supposed to simplify. When you started your business, it likely felt like a project you could carry in a backpack. You could pick it up or set it down as needed. But as profits climb into the mid-six figures, that backpack starts to feel more like the vehicle your whole family is riding in. You aren't just the driver anymore. You are the driver, the mechanic and the navigator.
This is usually when the S-Corp conversation starts. We find that for our clients, the decision to become an S-corp centers more around running the business as efficiently and sustainably as possible than it is about finding a tax loophole. Before we go further, let’s be clear:
An S-Corp is not the right structure for every business owner.
In this post, we’ll walk through the signals that suggest it may be time, and what to do once you decide to make the move.
The Two Hats of an S-Corp Business Owner
When you operate as a standard LLC or a sole proprietor, the IRS treats you and your business as a single, inseparable unit. Every dollar of profit is generally subject to self-employment tax (15.3%) in addition to income tax.
Once profits consistently move into the $100,000–$150,000+ range, that self-employment tax becomes more noticeable.
Making an S-Corp election allows you to draw a line through your income. You become two people: an employee and an owner. As an employee, you pay yourself a "reasonable" salary, the going rate for what you do. You pay payroll taxes on that amount. But the remaining profit, the "distribution," is passed to you as an owner. This portion is exempt from that 15.3% self-employment tax.
It’s essentially a structural upgrade. If a sole proprietorship is a studio apartment where everything happens in one room, an S-Corp adds a wall. It defines what is yours as a worker and what is yours as an investor in your own success.
Clear Signals It May be Time
We typically begin exploring an S-Corp election when we see several of these conditions present:
Profits are consistently above $100,000
Income is relatively stable and predictable
The owner is already maintaining clean bookkeeping
The business can support payroll and administrative costs
The owner wants more intentional retirement contributions
Quarterly tax payments are becoming burdensome or stressful
An S-Corp works best when the business has matured past survival mode and into operational stability.
For Many, Simplicity Wins
There is a cost to this upgrade. An S-Corp requires a formal payroll system and a separate business tax return (the 1120-S). It demands a level of bookkeeping rigor that some business owners aren't ready to take on.
If your income is still swinging wildly from year to year, or if you are in a season of life where adding corporate formalities feels like too heavy a lift, staying as a standard LLC or sole proprietor is often the better choice.
Switching to an S-Corp is easy. Switching back is a mess. If you decide to revoke your S-Corp status, you generally can’t go back for another five years. We tell our clients: do not marry an S-Corp for a one-year tax win. Only do it if the next five years of your life can sustain the administrative weight.
Federal tax savings are great, but understanding state rules is equally important. In California, for example, S-Corps are hit with a 1.5% franchise tax on net income, with a minimum of $800/year. This structure often makes S-Corps more attractive than a high-earning LLC, which faces an annual fee based on gross revenue in addition to the $800 minimum. Considering these state-level nuances is crucial when deciding on the optimal legal and tax structure for your business.
There is no prize for having the most complex tax structure. If your profit hasn't quite hit that six-figure mark, the tax savings of an S-Corp will likely be swallowed whole by the fees you’ll pay to accountants and payroll providers. In that case, the simplest path (the LLC or sole proprietor) is the most prosperous one.
The Gift of Automation
For the business owners we work with at Mana, the biggest draw of the S-Corp is often the mental bandwidth it clears.
When you are on a formal payroll, your taxes are withheld automatically. That quarterly scramble to calculate estimated payments vanishes. You get a steady, predictable paycheck. This structure also opens a wider door for retirement. A Solo 401(k) under an S-Corp allows you to contribute as both the employer and the employee. In 2026, that means you could potentially tuck away up to $72,000 if you’re under 50 years old or up to $80,000 if you’re over 50.
Done thoughtfully, your business becomes not just your current income engine, but a disciplined vehicle toward financial independence.
What to Do Once You’ve Decided It’s Time
This is where coordination matters.
An S-Corp election is an operational shift that works best when your financial team (your CPA, bookkeeper, and financial advisor) are aligned from the beginning.
Here’s how we guide clients through the transition:
1. Confirm the Election with Your CPA
Your CPA will:
File Form 2553 (S-Corp election)
Confirm timing (effective date matters)
Model projected tax savings vs. added costs
Determine a defensible “reasonable salary”
Help you design an Accountable Plan, so you receive tax-free reimbursement for business expenses.
We collaborate closely at this stage to ensure salary levels and business reimbursements align with broader financial planning goals including retirement contributions and cash flow needs.
2. Establish Payroll
You’ll need a payroll provider to:
Run regular payroll
Withhold federal and state taxes
File payroll tax reports
Issue W-2s
Many of our small business clients use Gusto for its simplicity and clean interface. Others who work closely with a CPA firm may use a company like ADP, particularly when payroll is bundled into broader accounting services. The right choice depends on how hands-on you want to be and how integrated your CPA relationship is.
3. Redesign Your Cash Flow System
This is where Mana steps in more directly.
We help clients:
Determine distribution cadence
Align tax withholding strategy with CPA
Build a reserve system inside the business
Avoid over-distributing profits
Without this coordination, S-Corps can unintentionally create cash flow tension. With proper design, they create stability.
4. Optimize Your Retirement Strategy
Once payroll is active, we evaluate:
Solo 401k contribution strategy, or determine if another retirement plan is best for your business.
Timing of employee vs. employer contributions
Integration with personal financial goals
Whether future employees (spouse or children) change plan design.
This is often where the structural benefits of an S-Corp compound meaningfully over time.
5. Review Annually
An S-Corp is not a “set it and forget it” structure.
Salary levels should be revisited annually.
Retirement contributions should align with profit.
Tax projections should be updated as income grows.
The structure should evolve as the business evolves.
Finding Your Inflection Point
Choosing to become an S-Corp is a signal that you’ve graduated. You’ve built something that can stand on its own. The goal is to move the administrative weight off your shoulders and onto a system designed to handle it. You didn’t build this business to spend your weekends looking at payroll reports. You built it to have the resources to care for the people you love.
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Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.