Addressing the Hype: What the S Corporation Videos Leave Out

The S corporation election is a real strategy, and
an incomplete story

Business owners have seen a great deal of online content promoting S corporation status as a way to reduce self-employment tax. The underlying strategy is legitimate and, in the right circumstances, valuable. The way it is typically presented leaves out several considerations that can change the answer.

One clarification at the outset: despite how it is often described, this is a tax election rather than a change to your business entity. An LLC that elects S corporation treatment remains an LLC.

The basic mechanic is straightforward. A sole proprietor or
single-member LLC generally pays self-employment tax at 15.3%
on net profit. With an S corporation election, profit is divided
between a salary subject to payroll tax and a distribution that is
not. That difference is the source of the savings.

Three points that commonly go unmentioned:

The savings narrow considerably at higher income. The 12.4% Social Security portion applies only to earnings up to $184,500 in 2026. Above that ceiling, only the 2.9% Medicare portion remains. Savings figures circulating online are frequently calculated as though the full 15.3% applies to every dollar shifted, which is not the case for an owner already earning past the wage base. At those income levels, the added compliance cost may exceed the tax saved.

Reasonable compensation is required, and there is no formula. The IRS requires shareholder-employees who perform substantial services to receive compensation comparable to what an unrelated person would be paid for the same work. Officer compensation is an established examination priority. There is no safe percentage, and an unsupportable position can result in reclassified wages, back payroll taxes, interest, and penalties.

The qualified business income interaction runs the opposite direction. Above certain income thresholds, the qualified business income deduction may be limited by the W-2 wages the business pays. A higher salary can therefore increase the deduction and offset some of the additional payroll tax. Minimizing salary is not automatically the better outcome.

THE CONSIDERATION MOST OFTEN OMITTED

An S corporation is subject to strict shareholder eligibility rules. Not every person or entity may hold S corporation stock, and most trusts cannot.

A trust holding S corporation stock generally must qualify as a Qualified Subchapter S Trust or an Electing Small Business Trust, each with its own requirements and elections. A revocable living trust is permitted during the grantor’s lifetime. Following death, there is a two-year window during which the trust must qualify or the stock must be distributed to an eligible shareholder. If neither occurs, the S election generally terminates at the end of that window, and the consequences are often not discovered until an estate is being administered years later.

The IRS has published streamlined procedures that resolve many inadvertent terminations and late elections without a private letter ruling. Situations outside those procedures generally do require a ruling request, which is costly and discretionary. Either way, the problem is considerably easier to prevent than to repair, and for anyone holding business interests alongside a trust, the election and the estate plan are best evaluated together.

Whether an S corporation election is appropriate depends on your specific numbers, entity structure, Virginia tax treatment, retirement plan design, and the trust documents already in place. It is a calculation rather than a general rule, and it is worth running before making the election rather than after.

Common questions

Is an S corporation election right for my business?
It depends on your net income, the compensation you can reasonably support, your entity structure, and how business interests interact with any trusts you have. The analysis requires your actual figures.

Does electing S corporation status change my LLC?
No. It is a tax election. Your LLC remains an LLC under state law, with the same operating agreement and the same liability protection. Only the federal tax treatment changes.

Is there a safe percentage to use for my salary?
No. The percentages circulating online have no basis in the tax
code or IRS guidance. Reasonable compensation is a facts-andcircumstances determination based on the work you actually
perform.

I already made the election. Should I have it reviewed?
If you hold the stock in a trust, or your estate plan directs business interests into a trust, yes. Eligibility problems are often invisible until an estate is administered, and they are far easier to fix before that point than after.

Where our tax practice fits

Hook Law maintains a tax practice led by an in-house CPA working alongside the estate planning and elder law attorneys you already know. Tax decisions and estate planning decisions are frequently the same decision viewed from different angles, and they are often made separately by professionals who never speak to one another. The S corporation election is a clear example of what that can cost.

If you are weighing the election, or you made it some time ago and it has never been reviewed against your estate plan, we are glad to look at it with you.