The S-Corp Election for Contractors: What It Is, When It Makes Sense, and What It Saves

If you're running a contracting business as a sole proprietor or single-member LLC, you're paying self-employment tax on every dollar of net profit. That's 15.3% up to the Social Security wage base, and 2.9% above it. For a contractor clearing $200,000 in net income, that's approximately $27,000 in SE tax before a single dollar of federal income tax is calculated.

The S-Corp election doesn't eliminate that tax. But it can cut it significantly. Here's how it works and how to know whether it applies to your business.

What the S-Corp Election Actually Is

An S-Corp is a tax classification, not a separate business structure. You don't dissolve your LLC and start over. You file IRS Form 2553 to elect S-Corp status, and from that point forward, your business is taxed differently.

The core mechanic: as an S-Corp owner, you split your income into two buckets. The first is a reasonable salary you pay yourself as a W-2 employee of your own company. The second is distributions — profit paid out above your salary. Self-employment tax applies to the salary. It does not apply to distributions.

That split is where the savings come from.

What the Numbers Look Like

A contractor with $200,000 in net income pays self-employment tax on all $200,000 as a sole proprietor or single-member LLC. That works out to approximately $27,200 in SE tax based on 2025 rates.

After electing S-corp status, the same contractor pays himself a reasonable salary of $75,000. FICA applies to that $75,000 — about $11,500. The remaining $125,000 comes out as distributions. No SE tax on that portion.

Total FICA cost: approximately $11,500. Savings compared to the prior structure: roughly $15,700 per year. That number compounds every year the election stays in place.

What "Reasonable Salary" Means

The IRS requires that S-Corp owner-operators pay themselves a salary that reflects what the market would pay someone doing the same work. You can't set your salary at $1 to avoid SE tax on everything.

For a contractor who is actively running jobs, managing crews, and doing estimating, a defensible salary typically falls somewhere between $60,000 and $90,000 depending on the market, the scope of the role, and what the business is generating. Setting it too low is the most common mistake, and it's the one the IRS specifically audits.

We do this analysis for every client who elects. The goal is the lowest defensible salary, documented correctly.

Who the S-Corp Election Makes Sense For

Not every contractor should file Form 2553. The election adds complexity — you now have payroll obligations, a separate business bank account requirement, and an additional tax return (Form 1120-S). There are costs associated with running payroll, and the administrative overhead is real.

The general threshold where the math starts working in your favor: net income above $75,000 to $100,000 per year. Below that, the tax savings often don't exceed the added cost and complexity.

Above that threshold, the savings typically dwarf the cost. A contractor clearing $150,000 net is leaving approximately $11,000 on the table every year without the election. At $250,000 net, the savings are closer to $16,000 annually.

One Other Thing Worth Knowing

The S-Corp election has a timing requirement. To take effect for a given tax year, Form 2553 generally needs to be filed within 75 days of the start of that year, or by March 15th for an existing business converting mid-year. Miss the window and you're waiting until next year.

If you're in the middle of a strong revenue year right now, that conversation is worth having before the year closes.

The Practical Takeaway

If your contracting business is generating consistent net income above $100,000, the S-Corp election is probably the highest-value tax strategy available to you right now. The savings are recurring, the math is straightforward, and the IRS has clear guidelines on how to do it correctly.

Whether it's right for your specific situation depends on your net income, your current structure, your payroll setup, and what the next few years look like for your business.

Download our guide to choosing the right business entity at buildandsavetax.com/resources/entityguide. It covers how the S-Corp election works, who it makes sense for, and the mistakes contractors make when they get the structure wrong.