Drake from Performance Financial breaks down one of the most confusing topics in small business taxation: S-Corp versus LLC. This isn't just accounting jargon—understanding the difference could save you $7,650 or more every single year, and with smart investing, turn those savings into over a million dollars by retirement.

Most small business owners operating as a standard LLC are paying 15.3% in self-employment taxes on every dollar of profit. That's money going straight to the IRS instead of staying in your pocket to grow your business, invest in equipment, or build long-term wealth.

Understanding Self-Employment Taxes: The 15.3% Problem

When you operate as a Schedule C or standard LLC, the IRS treats every dollar of your business profit as self-employment income. Here's what that means for your wallet:

Social Security Tax: 12.4% on income up to the wage base limit. For 2025, that means paying 12.4% on your first $176,100 of net income.

Medicare Tax: 2.9% on all income with no limit, and it increases to 3.8% for high earners.

Combined, you're paying 15.3% in self-employment tax before you even calculate your regular income tax. The IRS official guidance on Social Security wage limits explains these thresholds in detail.

For a business making $100,000 in net profit, that's $15,300 going to self-employment taxes alone. For $150,000 in profit, you're paying $22,950. These numbers add up fast, and most business owners don't realize there's a completely legal way to reduce this burden.

The S-Corporation Election: Your Biggest Tax Deduction

Converting to an S-Corporation through IRS Form 2553 fundamentally changes how your business income gets taxed. Instead of all your profit being subject to self-employment taxes, you split your income into two categories:

Reasonable Salary: You take a W-2 salary that's subject to payroll taxes (the equivalent of self-employment taxes). This must be reasonable for your role and industry, as outlined in the IRS S-Corp compensation guidance.

Owner Distributions: The remaining business profit flows through to you as a shareholder distribution, which is NOT subject to self-employment taxes.

Let's look at the math with Drake's example from the video.

Real Numbers: The $7,650 Annual Savings

As a Schedule C LLC:

• Net Income: $100,000
• Self-Employment Tax: $15,300 (15.3% on full amount)
• Regular Income Tax: Additional amount based on your bracket

As an S-Corporation:

• Salary: $50,000
• Distribution: $50,000
• Total Compensation: $100,000 (same as before)
• Self-Employment Tax: $7,650 (15.3% only on the $50,000 salary)
• Regular Income Tax: Same as before

Tax Savings: $7,650 per year

That's $7,650 staying in your pocket instead of going to payroll taxes. And this is just at $100,000 in profit. At $150,000, the savings increases proportionally.

The key is determining that "reasonable salary." While there's no hard rule, the IRS expects S-Corp shareholders who work in the business to take compensation comparable to what they'd pay someone else to do their job. Most CPAs recommend somewhere between 40-60% of business profit as salary, depending on your role, industry, and circumstances.

The Million-Dollar Opportunity: Investing Your Tax Savings

Drake takes the analysis further by showing what happens when you invest these annual tax savings. Using a conservative 6% return over 37 years (from age 30 to retirement at 67), those $7,650 annual tax savings grow to $1,077,673.

At a more realistic 10% return—closer to long-term stock market averages—that same investment strategy produces $2,810,564.

Even if those projections are half wrong, you're still looking at $500,000 to $1.4 million in retirement wealth, simply by making a smart business structure decision today and investing the difference.

This isn't theoretical—it's basic compound interest applied to tax savings that business owners are leaving on the table every single year.

S-Corp Requirements and Considerations

Before rushing to elect S-Corp status, understand the requirements outlined by the IRS S-Corporation guidelines:

• Must be a domestic corporation
• Can have only allowable shareholders (individuals, certain trusts and estates—not partnerships or corporations)
• Limited to 100 shareholders maximum
• Can have only one class of stock
• Cannot be certain types of financial institutions or insurance companies

You'll also need to run payroll for yourself, file an S-Corp tax return on Form 1120S, and follow the 1120S filing instructions carefully.

Additional considerations include S-Corp medical insurance rules, which treat owner health insurance premiums differently than regular employees.

When Does S-Corp Status Make Sense?

Not every business benefits from S-Corp election. Generally, the tax savings outweigh the additional complexity and costs when your business generates at least $75,000 in annual profit. Below that threshold, the payroll processing costs and additional tax return fees may eat up most of your savings.

The sweet spot for S-Corp election is typically businesses with $75,000 to $500,000+ in annual profit. At these levels, the self-employment tax savings are substantial enough to justify the extra administrative work.

At Performance Financial, we help Des Moines and Midwest business owners analyze whether S-Corp election makes sense for their specific situation. Our tax reduction planning service includes comprehensive analysis of your business structure, salary determination, and year-round strategy to maximize your tax savings.

Real-World Examples of S-Corp Success

Businesses across industries leverage S-Corp status for substantial tax savings:

DMS Demolition operates in the heavy construction space where proper tax structure is essential for managing project-based income fluctuations.

Partners MN demonstrates how service-based businesses benefit from strategic entity structuring.

Homes by Moderno shows custom home builders can optimize tax efficiency while managing complex project finances.

New Spaces represents the remodeling sector where proper business structure protects owner compensation.

Country Creek Builders exemplifies how residential construction companies structure for growth and tax efficiency.

These established businesses understand that entity structure isn't just about compliance—it's a strategic decision that impacts profitability and long-term wealth building.

The QBI Deduction Factor

The Tax Cuts and Jobs Act created the Qualified Business Income (QBI) deduction, allowing pass-through entity owners to deduct up to 20% of qualified business income. For S-Corp owners, this creates an additional layer of complexity in determining optimal salary versus distribution ratios.

Higher salary reduces self-employment tax savings but may increase QBI deduction limitations. Lower salary maximizes self-employment tax savings but could reduce available QBI deduction. The optimal balance depends on your total income, industry, and specific circumstances.

This is why working with a construction accounting specialist or industry-focused CPA is essential. They can model different scenarios and find the optimal strategy for your situation.

Retirement Plan Integration Strategy

S-Corp structure also impacts retirement plan contributions. Many small business retirement plans base contribution limits on W-2 compensation, meaning your salary level directly affects how much you can contribute to:

• SEP IRA plans
• Simple IRA plans
• Solo 401(k) plans
• Standard 401(k) plans
• Defined benefit plans

A salary that's too low to minimize self-employment taxes might prevent you from making desired retirement contributions. This creates a balancing act between immediate tax savings and long-term retirement planning.

Performance Financial's tax reduction planning includes analysis of these tradeoffs, ensuring your S-Corp strategy aligns with both short-term tax savings and long-term wealth building goals.

Common S-Corp Mistakes to Avoid

Mistake #1: Salary Too LowTaking an unreasonably low salary to maximize distributions invites IRS scrutiny. If audited, the IRS can reclassify distributions as wages, resulting in back taxes, penalties, and interest.

Mistake #2: Missing Payroll DeadlinesS-Corp owners must process regular payroll with all required withholdings and quarterly tax deposits. Missing deadlines results in penalties that can quickly erase tax savings.

Mistake #3: Improper Distribution TimingDistributions should generally align with stock ownership percentages and can only be taken when the company has adequate retained earnings and follows proper corporate formalities.

Mistake #4: Neglecting State Tax ImplicationsSome states don't recognize S-Corp elections or impose additional franchise taxes. Understanding state-level tax impact is crucial before converting.

Mistake #5: DIY Payroll and Tax PreparationS-Corps require specialized knowledge for proper payroll processing, quarterly estimated taxes, and annual business tax preparation. Mistakes cost more than professional help.

How Other Accounting Firms Approach S-Corp Strategy

Several accounting firms across the country specialize in S-Corp optimization:

Reduce My Tax focuses on comparing S-Corp versus LLC structures for Florida small business owners.

Passageway Financial helps Twin Cities businesses navigate the S-Corp conversion process.

West CPA Group provides education on self-employment tax mechanics for St. Louis area businesses.

Surety CFO emphasizes the importance of working with tax reduction specialists for construction companies.

AJ Financial offers comprehensive tax planning services including S-Corp analysis.

These firms recognize what we know at Performance Financial: proper business entity structuring is foundational to long-term tax efficiency.

The Performance Financial Difference for Contractors and Small Business Owners

At Performance Financial, we don't just file tax returns—we provide year-round strategic guidance that saves clients thousands annually. Our construction accounting services go beyond basic compliance to deliver actionable financial intelligence.

Drake emphasizes this in every client conversation: "If you're not getting aggressive S-Corp and tax reduction planning throughout the year, you're probably overpaying. Don't let a lazy, overly busy accountant lead to you overpaying thousands a year because they don't provide tax planning and S-Corp wisdom."

We serve contractors, small business owners, and entrepreneurs throughout Des Moines, Iowa and the broader Midwest region. Whether you're a custom home builder, painting contractor, pressure washing company, or any other small business owner, our team provides the specialized guidance you need.

Beyond S-Corp: Additional Tax Strategies

S-Corp election is just the starting point for comprehensive tax reduction. Smart business owners also leverage:

• Retirement plan contributions that reduce taxable income while building wealth
• Vehicle depreciation strategies like Section 179 and bonus depreciation
• Home office deductions properly documented and calculated
• Equipment write-offs timed strategically for maximum benefit
• Cost segregation studies for real estate investments

The most successful business owners don't view tax planning as a once-per-year activity during tax season. They work with their CPA quarterly or monthly, making strategic decisions throughout the year that reduce tax liability while supporting business growth.

Local Business Examples Demonstrating Smart Structure

The Des Moines and Midwest business community includes numerous examples of well-structured operations:

Gerl Construction operates in the competitive Iowa construction market where margins require smart tax planning.

Plan Pools demonstrates how specialty contractors benefit from proper business structuring.

Minnesota Landscapes shows landscaping contractors optimizing seasonal business tax strategy.

Charter Home Renovation represents remodelers who understand entity selection impacts profitability.

IBS Coating exemplifies how specialty coating companies structure for growth.

These businesses recognize that working with an experienced CPA who understands their industry is an investment, not an expense.

S-Corp Implementation Process

Converting to S-Corp status involves several steps:

Step 1: Entity FormationIf you don't already have an LLC or corporation, you'll need to form one with your state. Most businesses form an LLC first, then elect S-Corp tax treatment.

Step 2: File Form 2553Submit the S-Corp election form to the IRS within specific time frames—generally within 2 months and 15 days of the tax year beginning, or any time during the prior tax year.

Step 3: Set Up PayrollEstablish payroll processing for owner compensation, including all required withholdings, unemployment insurance, and workers' compensation if applicable.

Step 4: Determine Reasonable SalaryWork with your CPA to establish appropriate salary levels based on industry data, job duties, business profitability, and comparable positions.

Step 5: Process Regular DistributionsEstablish protocols for taking owner distributions beyond salary, ensuring proper documentation and adherence to corporate formalities.

Step 6: Quarterly Tax PlanningMeet with your CPA quarterly to review salary levels, adjust estimated tax payments, and plan for year-end tax moves.

Step 7: Year-End OptimizationBefore December 31st, finalize salary versus distribution allocation, maximize retirement contributions, and execute any final tax reduction strategies.

This process is what Performance Financial provides through our S-Corp setup and maximization services. We handle the technical requirements while coaching clients on optimal strategy.

Industry-Specific S-Corp Considerations

Different industries face unique S-Corp planning considerations:

Construction ContractorsSeasonal income fluctuations require careful salary planning. Project-based revenue means some months have high distributions while others require minimal owner compensation. Proper construction bookkeeping is essential for accurate tracking.

Professional ServicesHigh-income professional service providers see the largest dollar savings from S-Corp election, but must ensure salary levels align with their professional qualifications and market rates.

Retail and E-CommerceBusinesses with high revenue but lower profit margins need careful analysis to ensure S-Corp savings outweigh additional administrative costs.

Real EstateRental property income generally doesn't qualify for self-employment tax anyway, but active real estate professionals involved in flipping, development, or property management often benefit from S-Corp structure for their active income.

The Lazy Accountant Problem

Drake doesn't mince words about this issue: "If your accountant doesn't help you maximize your S-Corp each year, you're missing out on thousands in tax savings, or you're being set up to overpay in taxes or make mistakes."

Many business owners work with CPAs who:

• Only prepare tax returns annually without proactive planning
• Don't analyze whether S-Corp makes sense for your situation
• Fail to optimize salary versus distribution ratios annually
• Miss opportunities to coordinate S-Corp strategy with retirement planning
• Don't provide year-round guidance on tax moves

This reactive approach costs business owners thousands annually in unnecessary taxes. Worse, improper S-Corp implementation creates audit risks and potential penalties.

The Year-Round Tax Planning Approach

Effective S-Corp strategy requires ongoing attention:

January-MarchReview prior year results, file tax returns, and plan for current year salary levels based on projected profit.

April-JuneFirst quarterly estimated tax payment and check-in to review Q1 results against projections. Adjust salary if needed based on actual business performance.

July-SeptemberMid-year comprehensive review, second quarterly payment, and evaluation of year-end strategies. This is when major equipment purchases or retirement contributions get planned.

October-DecemberFinal quarterly payment and execution of year-end tax moves. Finalize salary versus distribution allocation, maximize deductions, and prepare for next year's strategy.

This is the level of service Performance Financial provides to contractors and small business owners throughout Iowa and the Midwest. Our clients receive proactive guidance throughout the year, not just a tax return in April.

Marketing and Growth Resources

Beyond tax strategy, business growth requires effective marketing. Feedbackwrench specializes in helping contractors and small businesses develop comprehensive marketing systems that drive qualified leads. Their SEO and local search optimization services complement the financial efficiency we provide at Performance Financial.

Other accounting firms doing excellent work in this space include:

Rivera Accountant provides comparative analysis for small business entity selection.

PTS Delray focuses on S-Corp maximization strategies for Florida businesses.

Ozarks Business Services serves Missouri small businesses with entity structuring guidance.

Tax Plan Ventures emphasizes comprehensive tax planning beyond simple return preparation.

More Local Success Stories

Additional Iowa and Midwest businesses demonstrating smart structure:

Kenosha Heating and Cooling represents HVAC contractors managing equipment-intensive businesses.

ADF Philly shows how specialty contractors structure for regional expansion.

Stormmaster Roofing operates in the high-liability roofing sector where proper structure protects assets.

Davis Contracting demonstrates general contracting business optimization.

Groundtech MN exemplifies excavation and site work contractor structure.

These businesses understand that paying for proper tax advice saves multiples of the cost through strategic savings.

When to Get Your S-Corp Analysis

The best time to convert to S-Corp status is before your business year begins, allowing a full year of tax savings. However, the analysis should happen as soon as your business becomes profitable enough to benefit.

Key triggers suggesting you need an S-Corp analysis:

• Net profit exceeding $75,000 annually
• Receiving 1099 income as an independent contractor
• Operating multiple business ventures
• Planning significant equipment or vehicle purchases
• Considering adding employees or expanding operations
• Currently paying quarterly estimated taxes exceeding $5,000

Don't wait until tax season to explore this strategy. By then, you've missed most of the current year's savings opportunity.

Book a Tax Reduction Analysis with Performance Financial to discover your specific savings potential. Our team analyzes your situation, determines if S-Corp makes sense, and provides a roadmap for implementation.

Additional Strategic Considerations

Experienced business owners coordinate S-Corp strategy with:

Asset ProtectionProper entity structuring protects personal assets from business liabilities. S-Corps provide liability protection similar to LLCs while delivering tax benefits.

Succession PlanningS-Corp stock transfers facilitate business transitions to family members or key employees more efficiently than other structures.

Business FinancingLenders prefer working with properly structured businesses that demonstrate financial sophistication through appropriate entity selection and clean books.

Exit StrategyWhen it's time to sell, buyers prefer purchasing stock in established corporations over acquiring sole proprietorship assets. This can significantly impact sale proceeds.

These considerations make entity selection a comprehensive strategic decision, not just a tax question.

The Bottom Line on S-Corp vs LLC

The numbers speak for themselves. A business generating $100,000 in annual profit saves $7,650 in self-employment taxes through proper S-Corp structure. Over a career, those savings compound into substantial wealth when invested wisely.

Drake's example showing how $7,650 annually invested at 6% grows to over $1 million—or nearly $3 million at 10%—isn't hype. It's basic financial mathematics applied to a tax strategy most business owners completely overlook.

But it requires doing it right. Improper S-Corp implementation creates more problems than it solves. Working with a CPA who specializes in small business tax strategy and provides year-round guidance is essential.

At Performance Financial, we help contractors, small business owners, and entrepreneurs throughout Des Moines, Iowa and the Midwest implement S-Corp strategy correctly while coordinating with retirement planning, equipment purchases, and overall business growth strategy.

The question isn't whether you can afford to work with a specialized tax advisor. The question is whether you can afford not to, when the cost of doing nothing is $7,650+ per year plus the lost opportunity to build million-dollar wealth.

Take the Next Step

Stop overpaying on self-employment taxes. Book your Tax Reduction Analysis today and discover exactly how much S-Corp election could save your business.

During your analysis, we'll:

• Calculate your current self-employment tax burden
• Model S-Corp tax savings for your specific situation
• Determine optimal salary versus distribution ratios
• Coordinate S-Corp strategy with retirement planning
• Provide a complete implementation roadmap
• Answer all your questions about the process

Don't leave $7,650—or more—on the table this year. The best investment you'll make is getting expert guidance on properly structuring your business for maximum tax efficiency.

Visit our contractor services page to learn more about our specialized approach to construction accounting and tax strategy.

Read our comprehensive guide on tax write-offs for small business owners to discover additional savings strategies.

Check our reviews to see what other business owners say about working with Performance Financial.

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