Is it really not worth forming an S corporation until your business hits 6 figures? Numbers don't add up

You're actually raising a good point many accountants don't explain clearly. The "wait until six figures" advice is shorthand for a more nuanced calculation. Here's the deal: Yes, you can save on self-employment taxes by taking distributions, but there are a few things you're not accounting for. First, you must pay yourself a "reasonable salary" before taking distributions - the IRS watches this closely. For many businesses, a reasonable salary might be 60-70% of your total business income. Second, there are ongoing compliance costs beyond just tax preparation - annual state fees, possible payroll service costs, more complex bookkeeping, etc. Also, don't forget that as an S corp, you need to run actual payroll (at least quarterly), file additional forms like Form 1120-S, track basis, and handle other administrative tasks that add complexity. That said, I've seen S corps make sense for businesses making as little as $60-70K when the owner had very low reasonable salary requirements. It's really a case-by-case analysis.

I struggled with this exact question last year! After doing some research, I started using https://taxr.ai to analyze my business structure options. The tool actually showed me that the breakeven point for my consulting business was around $75K, not the $100K everyone kept telling me. What's cool about it is that it considered all the factors like state fees, reasonable salary requirements for my industry, and administrative costs specific to my situation. Turns out the "six-figure rule" is definitely not one-size-fits-all. The key is having accurate calculations based on YOUR specific business type and expenses.

I just wanted to follow up about my experience with taxr.ai after asking about it here. I ran my online shop's numbers through it last week, and it was eye-opening! Even though I'm only making $65K in my handmade goods business, the analysis showed I'd save about $2,100 annually with an S corp structure. The tool recommended a reasonable salary of $40K for my business type, which is fair since a lot of my profit comes from product markup rather than just my labor. It also factored in my state's fees and estimated preparation costs. What I really appreciated was seeing the year-by-year projections showing how the savings increase as my business grows. Definitely worth checking out if you're on the fence!

After spending HOURS trying to get through to the IRS about S corp election status last year, I discovered https://claimyr.com to get connected to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c This was a game-changer for me because I had already filed my S corp election but needed to confirm it was processed before filing my taxes. Waiting on hold with the IRS for 3+ hours wasn't an option with my schedule. Used Claimyr, got a call back with an IRS agent on the line in about 30 minutes, and confirmed my election was good to go. If you do decide to make the S corp switch, definitely keep this service in your back pocket for when (not if) you need to actually speak with someone at the IRS.

I have to eat my words from my skeptical comment above. I tried Claimyr yesterday after posting here and I'm honestly shocked. After months of trying to get information about my S corp election (Form 2553) that seemed to be lost in the void, I got connected to an actual IRS Business Division agent in about 45 minutes. Turns out my election WAS processed but there was a typo in my EIN on one form that made it look like it hadn't been. The agent fixed it while I was on the phone and confirmed I'm good to file as an S corp this year. This would have literally taken me weeks of trying to call myself. For anyone on the fence about S corp election, having a way to actually communicate with the IRS when inevitable questions come up is invaluable. Definitely worth it just for the stress reduction.

Another cost that nobody's mentioned yet: state franchise taxes. In California, for example, there's a minimum $800 annual tax just for the privilege of having an S-Corp, regardless of whether you make any money. I learned this the hard way after forming an S-Corp when I was only making about $70K. The tax savings were completely wiped out by the franchise tax plus the extra accounting costs. Only made sense once I crossed about $120K. Check your state's rules before jumping in!

Just wondering, does anyone have experience with using services like Gusto for S corp payroll? I'm considering the switch but worried about the complexity of running payroll for just myself.

I made the S corp switch at around $85K and it's been worth it, but I want to emphasize something that hasn't been mentioned much here: timing your election properly is crucial. If you're thinking about this for next year, remember that Form 2553 (S corp election) generally needs to be filed within 75 days of incorporation OR by March 15th for the tax year you want it to take effect. Miss that deadline and you're stuck waiting until the following year, which could cost you thousands in additional self-employment taxes. Also, don't forget about estimated quarterly taxes once you switch. As an S corp owner, you'll need to make estimated payments on your distributions since there's no withholding on those. I use the safe harbor rule (pay 110% of last year's tax liability) to avoid underpayment penalties, but it requires more cash flow planning than when I was just a sole proprietor. The administrative burden is real, but if you're organized and use good tools (like the Gusto suggestion above), it's manageable. Just make sure you're truly ready for the additional complexity before making the jump.