At what net profit level does an S-Corp election make financial sense?

Typically when net profits reliably exceed $70,000 to $80,000 per year, as self-employment tax savings outpace the $2,000 to $3,500 cost of corporate tax filing and payroll processing.

What is an IRS 'reasonable compensation' audit risk?

Paying yourself an artificially low W-2 salary (e.g., $15,000 on $200,000 profit) to evade payroll taxes can trigger IRS penalties and recharacterization of distributions as wages.

At what net profit level does an S-Corp election make financial sense?

Typically when net profits reliably exceed $70,000 to $80,000 per year, as self-employment tax savings outpace the $2,000 to $3,500 cost of corporate tax filing and payroll processing.

What is an IRS 'reasonable compensation' audit risk?

Paying yourself an artificially low W-2 salary (e.g., $15,000 on $200,000 profit) to evade payroll taxes can trigger IRS penalties and recharacterization of distributions as wages.

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E-Commerce LLC vs S-Corp Self-Employment Tax Savings Model

Models reasonable officer compensation versus shareholder dividend distribution splits to identify the exact net profit tipping point where S-Corp election pays off.

Net Annual Business Profit ($)

E-commerce net profit before owner salary

Reasonable W-2 Officer Salary ($)

Defensible IRS operational wage for founder

Annual S-Corp Overhead ($)

Payroll service + CPA corporate return (1120-S)

Annual S-Corp Tax Savings

$8,975

15.3% FICA Payroll Tax Avoidance: $11,475

Compliance & Tax ItemAssessed Status / Amount

Annual Net E-Commerce Profit$140,000

Reasonable Officer W-2 Salary$65,000 (Subject to 15.3% FICA)