Is forming an LLC as S Corp worth it to reduce self-employment tax on $55K income in US?

Thanks for breaking this down! I've heard some people say you should pay yourself at least 60% of your business income as salary. Is that actually a rule? Also, do you have to take distributions regularly or can you just leave the money in the business account?

The 60% guideline isn't an official IRS rule, it's more of a general guideline some tax professionals suggest. The IRS simply requires a "reasonable salary" based on your qualifications, job responsibilities, and comparable positions in your industry and location. Documentation is more important than hitting a specific percentage. Regarding distributions, you have flexibility. You don't have to take distributions regularly - you can leave profits in the business account for future business expenses or take them periodically as needed. The tax benefit occurs because those retained earnings or distributions aren't subject to self-employment tax, only income tax when distributed.

How exactly does this work? Does it just give you general advice or actually help with the paperwork? I'm in a similar situation but making around $70k and getting killed on self-employment taxes.

Sounds interesting but I'm skeptical. Doesn't the IRS look at each situation individually? I'm worried about using a tool that might get me in trouble if I set my salary too low.

It doesn't just give general advice - it creates a personalized analysis report with specific numbers for your situation. You input your income details, location, and industry, and it runs calculations on potential tax savings with different salary/distribution combinations. It doesn't file paperwork for you, but it gives you clear documentation to support your salary decisions and shows exactly what forms you'll need. For your situation with $70k income, the savings would likely be more substantial than the original poster's case, making the S Corp strategy potentially more valuable. The tool actually helps prevent IRS issues by providing industry-standard compensation data specific to your location and role. It gives you documentation to support whatever salary you choose, which is exactly what you need if you're ever questioned. It's built to help you stay in compliance while maximizing legitimate tax savings.

How does this actually work? Seems weird that they can somehow get through when nobody else can. Is it expensive?

This sounds like complete BS. If it was that easy to get through to the IRS, everyone would be doing it. I've tried calling about my S corp stuff for MONTHS with no luck.

It works by using their system to navigate the IRS phone tree and secure your place in line. When they reach a certain point where a human agent is about to pick up, they connect the call to your phone. They're essentially doing the waiting for you. They don't have any special "cut the line" privileges - they're just automating the frustrating waiting process. Think of it like having someone physically stand in line for you at the DMV, then texting you when they're near the front. I was skeptical too until I tried it. I had been trying to reach someone at the IRS for weeks about my S Corp election deadline and kept getting disconnected after 2+ hours on hold. With Claimyr, I got connected with an actual IRS agent within an hour of submitting my request. They answered my specific questions about the election timing and documentation requirements. Saved me from potentially missing the filing deadline, which would have meant waiting another year to get the tax benefits.

That's actually really helpful to know about the Medicare surtax. My wife is up for a pretty significant promotion in the next year that could bump our combined income closer to $150K, and I'm expecting my business to grow too. Definitely something to keep in mind for the future planning. Do you know if there's a specific income threshold where the S-Corp election becomes a no-brainer? Like is there a point where the benefits clearly outweigh the costs?

There's no universal threshold where it becomes a "no-brainer" since everyone's situation differs, but many tax professionals suggest around $80,000-$100,000 in net business profit is where the benefits typically start to clearly outweigh the costs for most businesses. At your current $55,000, you're right on the borderline where it could make sense depending on your growth trajectory. If you expect to be at $70,000+ within a year or two, it might be worth setting it up now to have the structure in place. Another factor to consider is that if you wait until your income is higher, you'll have more self-employment tax savings but might attract more scrutiny on your reasonable salary determination. Starting at a lower income level sometimes gives you a more established salary history.

That's really smart! Do you have any specific tips on how to document all those different responsibilities? Like do you keep a time log or something?

Oh that's a good point about the calendar year requirement. My business tends to be seasonal with a lot of income at the end of the year, so that might actually work out well for planning purposes. Do you happen to know if I'd need to start taking a salary immediately after forming the S-Corp? Or could I wait until I've built up some reserves in the business account first?

You should start taking a reasonable salary as soon as the S-Corp election is effective. The IRS looks suspiciously at S-Corps that distribute profits without paying any salary, as that appears to be avoiding payroll taxes. That said, you don't necessarily need to take a salary with every single payment that comes in. Many S-Corp owners set up quarterly or monthly payroll for themselves, allowing some cash to accumulate in the business account before processing payroll. Just make sure that by the end of the tax year, you've paid yourself a reasonable salary relative to the profit the business generated. Your payroll schedule should be consistent and documented as part of your business practices.