S Corp or Not? The Election That Could Make or Break Your Tax Strategy
So, you’ve got your business up and running, cash is flowing, and now you're staring down the S Corp election question like it’s a choose-your-own-adventure novel. On one side, there's the promise of lower self-employment taxes; on the other, the risk of making a move that doesn't fit your long-term wealth plan.
Making the S Corp election isn’t just about saving on taxes today—it’s about playing the long game. And since retirement planning ties directly into how you pay yourself, your decision will impact more than just your take-home pay. Let’s break down the pros, cons, and how to choose the right path.
S Corp Election: The Good, The Bad, and The Tax-Saving
Why Business Owners Love the S Corp Election
The biggest reason business owners elect S Corp status? Self-employment taxes. Without the election, all of your net profits from a sole proprietorship or LLC are subject to the 15.3% self-employment tax (that’s Social Security and Medicare).
With an S Corp, your business splits your income into two parts:
Salary – You pay yourself a “reasonable” salary, subject to payroll taxes.
Distributions – Any remaining profits can be taken as distributions, which are not subject to self-employment taxes.
Translation? More money stays in your pocket instead of Uncle Sam’s.
Why an S Corp Might Not Be Right for You
Before you go all-in, know this: An S Corp isn’t free money.
You must take a “reasonable salary” – The IRS won’t let you pay yourself $10K in salary and take $200K in distributions to avoid taxes.
More admin work – You’ll need to run payroll, file extra tax forms, and likely pay for bookkeeping and tax prep.
Limits on retirement contributions – If your goal is to max out a SEP IRA, an S Corp might work against you.
Retirement Planning & S Corps: The Hidden Trap
Here’s where things get tricky. If you're an S Corp owner, your retirement plan options depend on how you pay yourself.
The SEP IRA Problem
A SEP IRA allows business owners to contribute up to 25% of their salary—but only their salary. Since the whole point of an S Corp is keeping that salary low, you could be severely limiting your retirement contributions.
For example:
If your business makes $200,000 and you pay yourself $50,000, your max SEP contribution is $12,500.
If you were a sole proprietor (no S Corp) and took the whole $200,000 as business income, your max SEP contribution could be $49,000+.
See the issue? A low salary limits your SEP deductions, which cancels out one of the biggest small-business tax perks.
Better Retirement Options for S Corp Owners
If you're running an S Corp and still want to save aggressively for retirement, consider these plans instead:
Solo 401(k) – Allows up to $69,000 (2024 limit) in contributions, combining employee deferrals and employer contributions.
Defined Benefit Plan – If you’re earning high income and want to supercharge retirement savings, this could let you sock away six figures tax-deferred.
Backdoor Roth IRA – If your income is too high for a traditional Roth IRA, this workaround lets you build tax-free retirement savings.
How to Choose the Right Path
If your goal is maximum tax efficiency, here’s how to decide:
TL;DR: If you're planning to use a SEP IRA, an S Corp might not be your best move. If you want to keep more income today and save via a Solo 401(k), an S Corp could work in your favor.
Final Takeaway
Choosing S Corp vs. no S Corp isn’t just about tax savings—it’s about long-term wealth strategy. If your business is growing and you’re thinking about retirement planning, you need a strategy that works for both your present and future self.
Still unsure? A financial pro (like, say, us 👋) can help you run the numbers and find the best path. Because at the end of the day, keeping more of your hard-earned money is the name of the game.
