Budget $3,000 to $6,000 a year, and often more at a traditional accounting firm, before you count a dollar of savings. An S-Corp (S corporation) election adds payroll, a second tax return, state-level entity taxes in many states, and a deduction swap that works against you at higher brackets. Most savings estimates leave these out, which is why the real result is often a third to a half of the number you were quoted. This checklist walks through each cost with real figures so you can run the full math.
If you are an independent consultant, fractional executive, coach, freelancer or any other sole proprietor or single-member LLC owner, the question is never "does an S-Corp save tax?" It is "does it save more than it costs?" Most Sumly users are still deciding: 48% run an LLC and 44% are sole proprietors, and only about 6% have elected S-Corp status. Here is the cost side.
Cost 1: Payroll, even for a company of one
An S-Corp owner who works in the business must be paid a reasonable salary as W-2 wages. That means running payroll: calculating withholding, depositing federal and state payroll taxes, filing quarterly Form 941 and an annual Form 940, issuing yourself a W-2, and registering with your state's unemployment agency.
Payroll software for a single owner runs $40 to $150 a month depending on the provider, so $500 to $1,800 a year. Federal unemployment tax (FUTA) adds $42 on the first $7,000 of wages. State unemployment insurance varies: in Illinois, for example, a new employer pays roughly $480 a year on the first $14,250 of wages, though some states exempt corporate officers.
If you miss a payroll deposit, penalties start at 2% and climb to 15%. The admin is real, and it is monthly.
Cost 2: A second tax return
As a sole proprietor you file Schedule C with your personal return. As an S-Corp you file Form 1120-S, a separate business return with its own due date (March 15 for calendar-year filers), plus a Schedule K-1 that feeds your personal return (IRS: About Form 1120-S).
Accountants typically charge $700 to $2,000 for an 1120-S on top of the personal return. Late filing costs $255 per shareholder per month for returns due in 2026, up to 12 months, even when no tax is due.
Cost 3: State and city taxes that only hit S-Corps
This is the cost most estimates skip, and it is the one that quietly erased an election in the example below.
| State or city | What an S-Corp pays that a sole proprietor does not |
|---|---|
| Illinois | 1.5% Personal Property Replacement Tax on S-Corp net income |
| California | 1.5% franchise tax on net income, with an $800 minimum (the minimum is waived in a newly formed S-Corp's first year, but the 1.5% still applies) |
| New York City | The city does not recognize the S election. An S-Corp pays the General Corporation Tax (8.85% of allocated net income) instead of the 4% Unincorporated Business Tax a sole proprietor pays, so the swing depends on your salary |
| Tennessee | Franchise and excise tax (6.5% excise on net earnings plus a franchise tax on net worth) |
| Most other states | Annual report fees of $25 to $300, and sometimes a minimum franchise or privilege tax |
A fractional executive in Manhattan netting $200,000 has to run both city taxes side by side, because the swap from UBT to General Corporation Tax can erase a meaningful share of what the election saves in payroll tax. Check your state and city before anything else.
Cost 4: The deduction you lose
Sole proprietors deduct half of their self-employment tax above the line (IRS: Self-Employment Tax). S-Corp owners lose that deduction. They gain a different one, since the employer half of payroll tax is a business expense, but the two only match when salary equals net profit. The bigger the distribution, the more the swap favors the sole proprietor side of the ledger.
For a consultant netting $150,000 at a $95,000 salary, the lost deduction (half of self-employment tax) is about $10,600 and the gained one (the employer half of payroll tax) is about $7,300. That $3,300 gap costs roughly $950 at a 29% combined rate. Not huge, but it belongs in the math.
Cost 5: A smaller QBI deduction
The 20% qualified business income deduction applies to business profit, not wages. Paying yourself $95,000 of salary removes $95,000 from the QBI base, which at a 22% bracket costs about $4,200 of the deduction's value. Many estimates ignore this entirely.
The exception: professionals in specified service fields (consulting, coaching, law, medicine, financial services) start losing QBI above $201,750 of taxable income for single filers in 2026 (fully gone at $276,750) regardless of structure, so there is no trade-off for them at higher incomes.
Cost 6: Benefits and retirement get more complicated
Three things change on day one of the election:
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Health insurance premiums for a more-than-2% owner must run through payroll and appear on your W-2 to stay deductible. The deduction amount is unchanged, but the setup is not optional.
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Solo 401(k) employer contributions are capped at 25% of W-2 wages, not of total profit. A lower salary means a lower retirement contribution ceiling, which can cost more in lost deferral than the election saves in payroll tax.
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Vehicle and home office expenses can no longer be deducted directly. You need an accountable plan so the S-Corp reimburses you, with mileage logs and receipts to match.
What does the full math look like? A worked example
Sumly recently ran the complete analysis for a self-employed physician with about $425,000 in annualized net profit. Several firms had projected meaningful savings. Our model included every cost on this page.
At a conservative $290,000 salary, the payroll and Additional Medicare savings came to about $3,890. Then: about $1,790 of state entity tax, $2,972 of annual compliance, and a deduction swap that nearly cancelled out. Net annual savings after tax: about $390. At the most defensible salary for his specialty, $390,000, the election would cost him about $1,850 a year.
He stayed a sole proprietor. The firms that said yes had applied 15.3% to the entire distribution and left out the state tax, the compliance cost and the lost deduction.
The pre-election checklist
Run these seven lines before you file Form 2553. If the last line is not comfortably positive, wait a year and revisit.
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Net profit, annualized from real bank data, not a hope for Q4
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Reasonable salary, with two or three market comparables written down
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Distribution (profit minus salary) multiplied by 15.3% if salary is below $184,500, or 3.8% if above
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Minus state and city entity taxes
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Minus payroll, the 1120-S and bookkeeping ($3,000 to $6,000, more at many firms)
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Minus the QBI deduction lost on wages, if you still qualify for QBI
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Minus any retirement contribution ceiling you give up
The Sumly Tax Savings Calculator gives you line 1 and your sole-proprietor baseline in a few minutes, which is where every honest S-Corp projection has to start. For line 2, see How do you set a reasonable salary for your S-Corp? For line 3, see Does an S-Corp election actually save the self-employed money?
FAQ
At what income does an S-Corp usually make sense?
There is no fixed threshold, but the math rarely works below about $80,000 of net profit, and it works best when net profit is well above a reasonable salary that sits below the Social Security wage base.
Can I run payroll myself to save the cost?
You can, but late or incorrect deposits carry penalties, and the time cost usually exceeds the software fee. Most single-owner S-Corps use a payroll provider.
Do I need a new LLC to elect S-Corp status?
No. An existing LLC files Form 2553 to be taxed as an S-Corp. There is no formation cost if the entity already exists.
What if I already elected and the savings turned out small?
You can revoke the election, but you generally cannot re-elect for five years. Compare the ongoing cost against the savings and talk to a tax pro before reversing course.
Does Sumly handle S-Corp payroll?
Yes. The Thrive plan ($149/mo) includes payroll alongside a dedicated Tax Pro who reviews your books monthly and flags the compliance items on this page.
This post is general education, not tax advice. State and city rules change and vary by situation. Talk to a Sumly Tax Pro before electing or revoking S-Corp status.
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