Should you convert your sole proprietorship to an S-Corp?

The core argument for S-Corp election is straightforward: as a sole proprietor, you pay self-employment tax (15.3%) on your entire net profit. As an S-Corp shareholder-employee, you only pay payroll taxes on a 'reasonable salary' — the remainder flows through as a distribution, which isn't subject to SE tax. On $120k of net profit with a $70k reasonable salary, that's roughly $7,650 in annual SE tax savings, minus the additional cost of running payroll and filing an 1120-S. The math usually works in your favor above $50k in net profit, but the election must be filed by March 15th of the year you want it to take effect — or within 75 days of forming a new entity. We help clients evaluate the tradeoff, set the right salary, and handle the IRS paperwork. The conversion itself is mechanical; the planning around it is where the value is.