At some point in every contractor's growth, someone mentions the S-Corp. Maybe it's an accountant, maybe it's another business owner, maybe it's a podcast. And then the contractor spends six months wondering if he's leaving money on the table.
Sometimes he is. Sometimes he isn't. Here's how to tell the difference.
Why the S-Corp Exists (From a Tax Standpoint)
When you're a sole proprietor or single-member LLC taxed as a disregarded entity, every dollar of profit is subject to self-employment tax (15.3% on the first $168,600 in 2024). That's on top of regular income tax. The SE tax covers Social Security and Medicare and it hits hard.
An S-Corp splits your income into two buckets: a salary you pay yourself (subject to payroll taxes) and a distribution of remaining profits (not subject to SE tax). If you make $200,000 in profit, pay yourself a reasonable salary of $80,000, and take $120,000 as a distribution, you only pay SE tax on $80,000 instead of $200,000. That difference, times 15.3%, is real money.
The "Reasonable Salary" Problem
The IRS requires that S-Corp owner-operators pay themselves a reasonable salary for the work they do. They're vague about what "reasonable" means, which is intentional. If you pay yourself $30,000 and take $170,000 in distributions on $200,000 of profit, that looks aggressive and the IRS can reclassify those distributions as wages. Audit risk goes up.
A reasonable salary is roughly what you'd pay someone else to do your job. For an HVAC business owner doing field work and running operations, that might be $70,000-$100,000 depending on your market. Pay yourself in that range, take the rest as distributions, and you're on solid ground.
When It Makes Sense to Elect
The general threshold is around $50,000 in net profit after your own labor cost. Below that, the administrative cost of running payroll, filing a separate S-Corp tax return, and maintaining corporate formalities often exceeds the tax savings.
Above $80,000-$100,000 in net profit, the savings are usually significant. Between $50,000 and $80,000, it depends on your state, your accountant's fees, and your specific situation. Get a projection from your accountant showing the actual dollar difference. Any decent accountant can run those numbers in 30 minutes.
What It Costs to Operate One
S-Corps file a separate federal return (Form 1120-S). You'll pay payroll taxes on your salary throughout the year. Many states have additional filing fees or minimum franchise taxes for corporations. Your accountant will charge more for the S-Corp return than for a Schedule C. Factor all of that in before deciding the switch saves you money.
If you're approaching $100,000 in profit and you're not at least having this conversation with your accountant, schedule that meeting. The savings can be substantial. Just go in with real numbers, not assumptions.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.