Most Houston businesses I help launch start as a single-member LLC taxed as a Schedule C sole proprietorship. It’s simple, cheap, and works fine until your income reaches a tipping point. At that point switching to S-corp election saves real money. Here’s the actual math, not the rule of thumb.
The savings come from FICA
As a Schedule C, you pay self-employment tax (SE tax) of 15.3% on every dollar of net business income. As an S-corp, you only pay FICA on the W-2 salary portion — not on the distributions. The math example:
$100,000 of net business income, Schedule C:
- SE tax: $100,000 × 92.35% × 15.3% = $14,130
- (Half is deductible above the line, but cash out the door is the same)
Same $100,000 as S-corp with $60,000 reasonable salary:
- FICA on $60,000 salary: $9,180
- SE tax on $40,000 distribution: $0
- Savings: $4,950
Why $50K-$80K is the typical breakeven
Below ~$50K of net income, the S-corp savings don’t cover the additional costs (S-corp tax return prep, payroll software, separate bookkeeping rigor). Above ~$80K, the savings start to clearly exceed the costs.
Costs of running an S-corp annually:
- S-corp return prep: $1,200-$2,000
- Payroll software (Gusto, etc): $500-$700
- Slightly more bookkeeping complexity: $0-$1,000
- Total: $1,700-$3,700/year
FICA savings start to clear that hurdle around $50K-$80K of net income, depending on what salary you set.
The benchmark by income level
- $30K-$50K net: Stay Schedule C. The S-corp overhead exceeds the FICA savings.
- $50K-$80K net: Possibly switch. Depends on your time horizon and growth trajectory.
- $80K-$200K net: Switch. Savings are clearly worth the costs.
- $200K+: Definitely switch. FICA savings of $5K-$15K/year easily clear the overhead.
The mechanics of switching
If you’re an existing single-member LLC and want to elect S-corp status:
- File Form 2553 with the IRS (must be filed within 75 days of the start of the tax year you want it to apply, or anytime in the prior year)
- Set up payroll — Gusto, ADP, QuickBooks Payroll all work
- Determine reasonable salary — the figure has to be defensible against comparable-role market data, and it needs to be documented before the return is filed
- Pay yourself W-2 salary, take the rest as distributions
- File Form 1120-S for the corporation each year + your personal 1040 with K-1 from the S-corp
What you give up
S-corps add complexity:
- You can’t deduct health insurance the same way (it goes through payroll, deductible above the line)
- Retirement contribution limits are based on W-2 salary, not total business income
- Section 199A QBI deduction is calculated differently
- Reasonable salary is the most-audited issue in S-corp returns
Late S-corp election
If you missed the 75-day window, you can file a late S-corp election with reasonable cause. The IRS routinely grants these. Don’t skip the year just because you missed the formal deadline.
The bottom line
If your Houston business is netting more than $80,000 and you’re still on Schedule C, you’re likely overpaying FICA by $4,000-$8,000 per year. The switch takes one form, an hour of payroll setup, and pays for itself in the first year.
To run the actual numbers on your specific business and figure out the right time to switch, call (832) 594-0339 or use the contact page. We do this analysis as part of tax planning.