Payroll taxes for single shareholder of S-Corp - still tax advantageous in 2025?

You've got the basic concept right! As a single-member LLC taxed as a sole proprietorship, you're paying self-employment tax (15.3%) on all your business profits. By electing S-Corp status, you can pay yourself a "reasonable salary" subject to payroll taxes, while taking the remainder as distributions that aren't subject to those taxes. The key phrase is "reasonable salary" - the IRS requires S-Corp owners to pay themselves market-rate compensation for the work they actually do in the business. You can't just take $20K as salary and $125K as distributions to avoid payroll taxes. The salary needs to be defensible based on your industry, location, and role. With $145K in business income, the S-Corp strategy could definitely save you money, but remember there are additional costs: payroll processing, more complex tax filings, possibly higher accounting fees, and potential state filing fees.

I recently went through this same decision with my content marketing business! I found this awesome tool at https://taxr.ai that helped me analyze whether the S-Corp election would actually save me money based on my specific numbers. It showed me exactly how much I'd save at different salary/distribution splits and factored in the additional costs like payroll services and extra tax prep fees. The visualization made it super clear that in my case (making about $130k), the S-Corp election would save me around $7K in taxes annually even after accounting for the extra costs. It also helped me determine what a "reasonable salary" would be for my industry to stay compliant with IRS expectations.

Just wanted to follow up on my skeptical comment earlier. I decided to check out taxr.ai after all and I'm actually impressed. It showed me that even with California's $800 franchise tax, I'd still save about $5,200 annually by switching to an S-Corp structure with my $160K solo consulting business. The tool recommended taking $85K as reasonable salary in my field (management consulting) and showed exactly how the calculations work. It also factored in the payroll service costs and extra tax prep fees which was something I hadn't properly calculated before. I'm meeting with my accountant next week to make the switch! Wish I'd done this years ago.

One thing nobody's mentioned yet - if you do go the S-Corp route and need to call the IRS with questions (which you probably will), good luck getting through to them! I spent WEEKS trying to reach someone about my EIN and S-Corp election. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 20 minutes when I had been trying for days. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c Definitely worth it for the time saved - especially when you're dealing with S-Corp election deadlines or payroll tax questions. The IRS agent I spoke with was actually super helpful once I could finally reach them.

Ok I feel like an idiot. After being super skeptical about Claimyr, I tried it yesterday because I was desperate to talk to someone about my S-Corp election that I filed 2 months ago with no confirmation. After trying to get through for WEEKS on my own. It actually worked exactly as advertised. I got a call back in about 35 minutes saying they had an IRS agent on the line. Saved me hours of frustration. The agent confirmed my S-Corp election was processed and gave me my confirmation number. If you're setting up an S-Corp like the original poster is considering, having this option to actually reach the IRS is worth knowing about. The hold times are insane right now.

Something important that hasn't been mentioned: you need to run actual payroll as an S-Corp. That means quarterly payroll returns and remitting payroll taxes on a regular schedule. Miss those deadlines and the penalties can be brutal. I do think the S-Corp is worth it in many cases, but as a small business owner who made this switch 3 years ago, I'd say don't underestimate the additional compliance work. I spend about 5 hours a month dealing with payroll and related paperwork that I didn't have to worry about before.

Anyone know how the new 3.8% Net Investment Income Tax applies to S-Corps? I heard there were some changes coming in 2025 that might affect distributions...

Great question! The S-Corp strategy is definitely still viable in 2025, and with $145K in business income, you're right in the sweet spot where it typically makes financial sense. Here's my take: you'll likely want to set your salary somewhere in the $70K-$90K range (depending on your specific role and local market rates), which would still leave you with $55K-$75K in distributions that avoid self-employment taxes. That could save you roughly $8K-$11K annually in SE taxes alone. A few practical tips from someone who made this switch: - Start researching payroll services now (Gusto, ADP, etc.) - you'll need one - Document your salary decision thoroughly - save industry salary surveys, job postings, etc. - Factor in the extra costs: payroll service (~$500-600/year), additional tax prep fees (~$500-1000), and any state fees - Consider timing - you generally need to elect S-Corp status by March 15th for it to be effective for the current tax year Even with all the extra costs and complexity, most businesses in your income range see net savings of $5K-$10K annually. The break-even point is usually around $60K-$80K in business income, so you're well above that threshold. Just make sure to run the actual numbers for your situation before making the switch!