Should I elect to be taxed as S-Corp for my software engineering LLC?

The "reasonable salary" requirement is the key factor here. The IRS expects your salary to be comparable to what others in your position would earn in your geographic area. For a software engineer making $130k total, taking only $65k as salary would likely raise red flags with the IRS. That's probably too low for a reasonable software engineering salary in most markets. You'd want your salary to be closer to what you'd pay someone to do your job - which sounds like it might be the full $130k based on what you've said. For your second scenario with $260k income, you're right that Social Security tax phases out (at $168,600 for 2024), but Medicare tax (2.9% for self-employed) continues indefinitely with no cap, plus the additional 0.9% Medicare surtax on earnings over $200k. As an S-Corp, any amount you take as distributions above your reasonable salary would avoid these Medicare taxes. The real benefits kick in when your business consistently earns significantly more than a reasonable salary for your position. Don't forget to factor in the additional costs of running an S-Corp though - payroll processing, potentially higher accounting fees, more complex tax filings, etc.

Hey! I was in almost the exact same situation as you two years ago. My LLC was making around $170k and I was trying to decide about S-corp election. I ended up using https://taxr.ai to analyze my specific situation and it was super helpful. The tool helped me see that in my case, the S-corp made sense even though my reasonable salary would be high. The analysis showed I could legitimately set my salary around $130k and take the rest as distributions. This saved me about $5.7k in taxes the first year, which more than covered the extra costs of payroll and more complex tax filings. What was cool is it factored in all the state-specific rules too (I'm in Washington), which my regular accountant hadn't fully considered. The report also pointed out some retirement planning options that worked better with the S-corp structure.

Coming back to admit I was wrong about taxr.ai! After seeing the replies, I decided to give it a try with my cybersecurity consulting LLC. I'm making about $190k and had been on the fence about the S-Corp election. The analysis showed I could reasonably set a $135k salary and take the rest as distributions, saving around $7.8k annually even after accounting for the extra costs. What really convinced me was how they broke down the specific reasonable salary justification by region and specialization, so I'll have documentation if the IRS ever questions it. Plus, they explained how I could structure a Solo 401(k) with the S-Corp to get even more tax advantages. Been using it for 7 months now and the tax savings are tracking exactly as they projected. Definitely worth the one-time fee for the analysis!

I had a nightmare trying to get guidance from the IRS about reasonable compensation requirements for my S-Corp. Spent HOURS on hold only to get disconnected. Finally found https://claimyr.com and used their service to get a callback from the IRS in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c Got connected to a really helpful agent who walked me through the factors they consider for reasonable compensation for tech professionals. They pointed me to some specific documentation guidelines that have kept my S-Corp clean for three years now. Saved me days of frustration!

I have to eat my words about Claimyr. After posting my skeptical comment, I tried it because I needed answers about S-Corp reasonable compensation documentation and couldn't get through to the IRS myself after multiple attempts. Got a callback in about 27 minutes (they estimated 35) and spoke with an IRS representative who was incredibly helpful about my specific situation. They confirmed that for software engineers, they typically expect to see salary at 65-80% of total compensation up to about $200k in business income, which answered my exact question. Would have spent days trying to get this information otherwise. Definitely saving this service for tax season when the hold times get even worse!

Everyone's talking about the tax advantages, but don't forget about the Qualified Business Income (QBI) deduction! As an LLC taxed as a pass-through, you get the 20% QBI deduction on your entire profit. With an S-Corp, you only get it on the distribution portion, not your salary. So if you make $180k and take $140k as salary, you're only getting QBI on $40k, vs potentially the full $180k as an LLC. That's a significant difference that could offset some of your self-employment tax savings. This is why the calculation isn't as simple as "S-Corp always saves taxes" - it really depends on your specific numbers and situation.

Has anyone considered the state tax implications? I'm in California and found that the S-Corp comes with an $800 minimum franchise tax PLUS a 1.5% tax on net income. My CPA showed me that when factoring in these state-specific costs, the S-Corp advantage was much smaller than I initially calculated. Might be worth checking your state's rules - some states don't recognize S-Corps or treat them differently than the federal government does.

Great discussion everyone! As someone who made the S-Corp election last year for my web development LLC, I wanted to share some real numbers to help with the decision. I was making around $180k and after consulting with my CPA, we set my reasonable salary at $125k. This saved me about $4,200 in self-employment taxes annually. However, the additional costs were significant - $600/year for payroll service, $1,200 extra in accounting fees, and about 4-5 hours of my time quarterly dealing with payroll filings. The net benefit was still positive at around $2,400/year, but it wasn't the massive savings I initially expected. The sweet spot seems to be when you're consistently earning $200k+ where the tax savings really start to outweigh the hassle and costs. One thing I wish I'd known earlier: you can always revoke the S-Corp election if your income drops or circumstances change, but you have to wait 5 years to elect it again. So make sure you're committed to the income level that makes it worthwhile before making the switch. Also, don't forget about estimated quarterly payments - they become more complex with an S-Corp since you need to account for both payroll taxes and the pass-through income from distributions.