An eligible corporation or LLC can elect S corporation tax treatment. Wages for an owner’s services are subject to employment taxes; distributions generally are not subject to self-employment tax. That does not make distributions free of income tax. Shareholders generally report their share of taxable business income whether it is distributed or retained.
Compare the whole arrangement: defensible compensation, employer payroll tax, filing costs, retirement contributions, QBI and state taxes. Revenue or profit alone cannot establish that an election will help. There is no universal break-even profit level or approved salary-to-distribution ratio.
An example
Hypothetical: a business has $150,000 before owner wages and employer payroll tax. If $60,000 is reasonable compensation, ordinary employer FICA of $4,590 leaves $85,410 before other adjustments, not $90,000. That remaining profit is not a calculation of tax savings.
Reviewed October 7, 2026. IRS reference ↗
This is a general reference. Discuss how the rules apply to your business with your tax professional.