The general threshold is when your business net income consistently exceeds around $70,000 per year. At that point, the self-employment tax savings from S-Corp status typically outweigh the additional costs of payroll processing, extra tax filings, and higher accounting fees.

Here is why that number matters. As a sole proprietor or single-member LLC, you pay self-employment tax of 15.3% on your entire net income. That breaks down to 12.4% for Social Security (up to the wage base) plus 2.9% for Medicare on everything. When you elect S-Corp status, you pay yourself a reasonable W-2 salary and take the remaining profit as a distribution. Only the salary gets hit with payroll taxes. The distribution does not.

So if your net income is $100,000 and you pay yourself a $60,000 salary, you save self-employment tax on the $40,000 distribution. That is roughly $6,120 in savings. But you need to subtract the costs of maintaining S-Corp status, including payroll processing, an additional tax return (Form 1120-S), and potentially higher accounting fees. If those costs total $3,000 to $4,000 annually, you are still ahead. Below $70,000 in net income, the savings shrink to the point where they barely cover the added expense.

The “reasonable salary” piece is non-negotiable. The IRS watches for S-Corp owners who pay themselves artificially low salaries to minimize payroll taxes. Your salary needs to reflect what someone in your role and industry would actually earn. Paying yourself $20,000 when your business generates $150,000 will attract scrutiny.

New York has its own requirements on top of the federal election. Filing Form 2553 with the IRS gets you the federal S-Corp classification, but New York requires a separate state election on Form CT-6 filed with the Department of Taxation and Finance. If you miss the CT-6, New York treats your business as a C-Corp for state purposes. That creates a tax situation you do not want.

NYC business owners should also factor in the Unincorporated Business Tax. As a sole proprietor or LLC, you are subject to NYC UBT on business income over $95,000. S-Corps are not subject to UBT. This additional savings can make the S-Corp election worthwhile for NYC businesses at slightly lower income levels than the general $70,000 rule suggests. However, S-Corps do pay the NYC General Corporation Tax and a fixed dollar minimum tax based on gross receipts, so run the numbers on both sides before assuming S-Corp automatically saves you money in the city.

You also need to be running payroll from day one of the election. That means registering as an employer with the IRS, New York State, and NYC. It means withholding income and payroll taxes, making deposits on schedule, and filing quarterly returns. This is not a one-time setup. It is an ongoing obligation every pay period for as long as you maintain the election.

Timing matters too. Form 2553 must be filed by March 15 for the election to apply to the current tax year. File it late and you are waiting until next year unless you qualify for late election relief. The CT-6 follows similar deadlines.

Talk to your accountant before making this move. If your income fluctuates significantly, a bad year with S-Corp status means you are still paying payroll taxes on your salary even when the business barely breaks even. The election works best when income is stable and consistently above the threshold. Our team of Bronx bookkeepers can help you keep your financials clear so you and your tax advisor have the numbers you need to make this decision with confidence.