Is the IRS still allowing S-Corp payroll tax savings for a single shareholder LLC?

The S-Corporation strategy for reducing self-employment taxes is still valid and frequently used. Here's how it works: as an S-Corp shareholder-employee, you must pay yourself a "reasonable salary" that's subject to payroll taxes (Social Security and Medicare), but additional profit can be distributed as dividends which aren't subject to those payroll taxes. What's "reasonable" depends on your industry, location, skills, and what similar positions would earn. The IRS looks closely at this - too low a salary raises red flags. For a business making $135K, you might need a salary of $60K-$90K depending on your industry and role, with the remainder available as distributions. Keep in mind you'll have additional costs: filing Form 1120-S, payroll processing, potential state filing fees, and possibly an accountant. You'll also need to run proper payroll, withhold taxes, and issue yourself a W-2.

I went through this exact dilemma last year with my marketing consultancy. After talking to multiple accountants who gave me different advice, I found this tool called taxr.ai (https://taxr.ai) that analyzed my business structure and gave me clear guidance on the S-Corp question. They showed me exactly how much I could save and what the IRS considers a "reasonable salary" in my specific industry. The tool analyzed my business financials and gave me a detailed report showing scenarios for different salary/distribution splits with the associated tax savings. It also provided data on what others in my industry were taking as salary vs distributions to back up my "reasonable compensation" decision if the IRS ever questioned it.

Just wanted to follow up about my experience with taxr.ai since I went ahead and tried it after asking about it here. I was shocked at how specific it got with my construction business! It showed me that most construction company owner-operators in my revenue bracket ($150-200K) were taking around 65% as salary. The tool saved me from making a big mistake - I was planning to take only 40% as salary which apparently would have been way too aggressive for my industry. It also showed me how to document my salary decision properly which my accountant said was crucial. Definitely worth checking out if you're considering the S-Corp route!

If you're trying to contact the IRS to get clarification on S-Corps and reasonable compensation standards, good luck! I spent 3 WEEKS trying to speak with someone and kept getting disconnected or waiting for hours. Then I found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c). They actually got me connected to an IRS agent in under 20 minutes! I was able to ask specific questions about my situation as a single-member S-Corp and get clear answers directly from the IRS. The agent walked me through the factors they consider for reasonable compensation and confirmed that yes, the strategy is still valid as long as I'm paying myself appropriately for the work I do. Turns out there's no formula but they look at industry standards, qualifications, time spent, etc.

Alright, I feel like I need to eat my words here. After being completely skeptical about Claimyr, I decided to try it yesterday because I was at my wit's end with IRS questions about my S-Corp salary requirements. Not only did it work, but I was connected to an IRS agent in about 15 minutes! The agent confirmed everything about the S-Corp strategy still being valid (as of 2025) as long as I'm paying a reasonable salary. She even directed me to some helpful resources on the IRS website that specifically address the question of reasonable compensation for S-Corp shareholders. Saved me hours of frustration and searching. I honestly can't believe how well it worked after my multiple failed attempts to reach someone.

Something nobody's mentioned yet - make sure you're considering ALL the costs of an S-Corp before making the switch. I did this last year and while I am saving on SE tax, I'm paying about $1200/year for payroll services, $850 for my S-Corp tax return (Form 1120-S) on top of my personal return, plus state filing fees. In my state (CA) there's also an $800 minimum franchise tax just for the privilege of having an S-Corp. Run the numbers carefully! For me it's still worth it but barely - if I was making under $100k it probably wouldn't be.

Quick question about the timing - if I operate as an LLC now but want to switch to S-Corp, can I do that midyear or do I need to wait until January to make the change? I just learned about this strategy and don't want to wait 6 months if I don't have to...

I made this exact transition from LLC to S-Corp election about 18 months ago when my consulting business hit similar revenue levels. The strategy absolutely still works, but you need to be strategic about it. For your $135K revenue, you'll likely want to pay yourself somewhere in the $70-85K range as W-2 salary (this varies by industry and location). The key is documenting WHY that's reasonable - look up comparable positions on salary websites, consider your education/experience, hours worked, etc. The tax savings can be significant - you'll save about 15.3% in self-employment taxes on the distribution portion. But factor in the additional costs: payroll processing (~$100/month), S-Corp tax return preparation (~$800-1500), and your time for compliance. One tip that saved me headaches: set up your payroll to pay yourself the same amount each month rather than trying to optimize it quarterly. Makes bookkeeping much cleaner and looks more legitimate to the IRS. Also, make sure you're actually taking those distributions regularly throughout the year, not just on paper at year-end. The paperwork isn't terrible once you get systems in place, and the tax savings usually justify the extra complexity at your income level.