An S-Corp is a pass-through tax election available to eligible C-Corps and LLCs that allows business income to pass through to owners' personal returns while splitting income between W-2 salary and distributions — the salary portion is subject to payroll tax; the distribution portion is not. Eligibility: ≤100 shareholders, all U.S. citizens or residents, one class of stock.
The S-Corp election is made by filing Form 2553 with the IRS (https://www.irs.gov/forms-pubs/about-form-2553). The entity remains an LLC or corporation legally — only the tax treatment changes. The S-Corp election can save meaningful self-employment tax: an owner must pay themselves a 'reasonable salary' (subject to payroll taxes of 15.3% combined employer/employee up to the Social Security wage base), but remaining net profit is distributed without additional payroll tax. Example: LLC-taxed owner with $200K net profit pays ~$22K in self-employment tax on the full $200K. Same business with S-Corp election pays $100K reasonable salary (bearing ~$15K payroll tax) and $100K distribution (no SE tax) → saves roughly $7K/year (varies by salary level and income). For financing, S-Corp income shows up on the owner's K-1 (Form 1120-S). Lenders underwriting against tax returns use Schedule K-1 income plus W-2 wages paid by the S-Corp as the qualifying income figure. One wrinkle: reasonable salary requirements mean the owner must pay themselves enough not to trigger IRS scrutiny — typically at least 40–50% of distributions as salary. Extremely low W-2s relative to income can invite audit. The IRS provides S-Corp tax guidance at irs.gov/businesses/small-businesses-self-employed/s-corporations (https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations). The SBA's business structure guide (https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) explains S-Corp advantages and requirements for small businesses.
The break-even for most businesses is roughly $40,000–$60,000 in net profit annually, where the SE tax savings offset the cost of running payroll (QuickBooks Payroll, Gusto, or a payroll service — typically $50–$150/month). At $100K+ net profit, S-Corp election is almost universally advantageous. Consult a CPA to run the numbers for your specific situation.
100 shareholders or fewer; all shareholders must be U.S. citizens or permanent residents (no foreign owners, partnerships, or most trusts as shareholders); only one class of stock; and the entity must be a domestic corporation or LLC. For multi-member LLCs wanting S-Corp treatment, all members must be eligible shareholders.