If you’re running a profitable LLC, you’ve probably heard whispers—or full-on pitches—about switching to an S-Corp for tax savings. Maybe from a CPA. Maybe from TikTok. Maybe both.
At the center of that conversation? The $80K rule—a benchmark that signals when your business might be earning enough for an S-Corp election to make financial sense. It’s not a hard line, but it’s a smart place to start asking questions.
Because when your business crosses a certain income threshold, you’re no longer just managing growth—you’re managing tax exposure. And the structure you choose plays a big role in that.
This article breaks down what the S-Corp election really does, how the $80K rule came to be, and why timing and context matter more than you think. You’ll also see where Harness fits into the picture—especially if you’re ready to approach your business structure like the strategic decision it is.
Table of Contents
- What’s the difference between an LLC and an S-Corp?
- What is the $80K rule—and why does it matter?
- What are the tax savings—and how do you calculate them?
- What are the additional costs and admin requirements?
- When should you not elect S-Corp status?
- How Harness can help
What’s the difference between an LLC and an S-Corp?
Before taking a look into the $80K rule, it’s important to understand what changes—and what doesn’t—when an LLC elects S-Corp status.
While both structures offer liability protection, the key difference lies in how the IRS taxes your business income. Let’s break it down:
The LLC baseline
An LLC (Limited Liability Company) is a flexible business entity. By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs as partnerships. That means profits pass through to the owners, and all earnings are subject to self-employment taxes—15.3% covering Social Security and Medicare.
What changes when you elect S-Corp status
When an LLC elects to be taxed as an S-Corp, it remains an LLC legally, but its tax treatment changes significantly. You (as the owner) are now considered both an employee and a shareholder:
- You pay yourself a reasonable salary, which is subject to payroll taxes.
- Remaining profits are distributed as dividends, which are not subject to self-employment tax.
This creates a valuable tax-splitting opportunity—but also introduces payroll responsibilities, stricter compliance, and more detailed tax filings.
What is the $80K rule—and why does it matter?
If you’ve searched “when should an LLC become an S-Corp,” chances are you’ve heard about the $80,000 rule. Notably, it’s not a law, and it’s not an IRS guideline. It’s a practical benchmark used by tax professionals to help small business owners evaluate when the tax savings of S-Corp status begin to outweigh the added complexity.
The $80K figure refers to net business profit—that is, your income after expenses. Once your annual profits approach this threshold, electing S-Corp status could potentially reduce your tax burden.
So why $80K? Let’s dig into the reasoning:
- Self-employment taxes are costly: Without an S-Corp election, all LLC profits are subject to the 15.3% self-employment tax.
- S-Corp owners can split income: By designating a portion of income as salary (which is taxed) and the rest as distributions (which aren’t), you can avoid paying self-employment tax on a significant chunk of your earnings.
- But it’s not free: S-Corps bring added costs—payroll services, stricter accounting, and more complex tax filings. These typically run $2,000–$3,000+ annually.
When your profit exceeds ~$80,000, the potential tax savings on distributions often surpass these added expenses. Below that number? The math usually doesn’t work in your favor.
Of course, this isn’t a hard rule. It depends on your state, your business model, your growth trajectory—and whether you want to take on the extra admin.
Tip: Want to understand the full tax picture before you make the switch? Try Harness’s Equity Tax Insights Tool to evaluate scenarios based on your unique income and entity structure.
What are the tax savings—and how do you calculate them?
The main financial advantage of switching your LLC to an S-Corp? Reducing your self-employment tax liability. But how does that actually work—and what does the IRS allow?
Here’s a simple concept:
S-Corp owners can pay themselves a salary and take the rest as distributions.
- Salary: This portion is subject to employment taxes (Social Security + Medicare = 15.3% combined).
- Distributions: Not subject to self-employment tax—so the more you can reasonably classify as a distribution, the more you can potentially save.
Example:
Let’s say your LLC brings in $120,000 in net profit for the year.
- As a sole proprietor LLC, you’d owe 15.3% self-employment tax on the entire amount:
➤ $120,000 x 15.3% = $18,360 - As an S-Corp, let’s say you pay yourself a reasonable salary of $70,000 and take $50,000 as a distribution:
➤ Only the $70,000 is subject to employment tax = $10,710
➤ The $50,000 distribution escapes that tax
➤ Tax savings = $7,650
Now, subtract around $2,000–$3,000 in extra compliance costs (payroll services, tax filings, accounting).
You still walk away with $4,000–$5,000 in net annual tax savings.
Important: The IRS requires that your salary be “reasonable.” If you lowball your own compensation in favor of distributions, you risk penalties. This is where having an advisor—like those at Harness—becomes incredibly useful.
The sweet spot for S-Corp tax savings typically starts to materialize after $80,000–$100,000 in profit, depending on your location and service costs. But it’s not only about the numbers, it’s about how your income is structured.
What are the additional costs and admin requirements?
While S-Corp election can save you thousands, it comes with new layers of responsibility—and costs. It’s not a set-it-and-forget-it move. Understanding the added complexity is key to making a sustainable decision.
Ongoing costs you should anticipate:
- Payroll services: You’ll need to run payroll and issue W-2s—even to yourself. Expect to pay $500–$1,000+ annually depending on the provider.
- Accounting fees: Filing as an S-Corp means a more complex tax return (Form 1120S + Schedule K-1s). Your CPA may charge $1,000–$2,000 more per year.
- State fees: Some states charge S-Corps additional filing or franchise taxes. For example, California imposes a 1.5% franchise tax on net income, with a $800 minimum.
- Reasonable compensation documentation: You’ll need to justify your salary with industry benchmarks or role comparisons. This might require advisor input or additional paperwork.
- Separate books: You’ll need to clearly separate business distributions from wages, which requires clean bookkeeping and may require switching to more robust accounting software.
While these steps aren’t insurmountable, they add friction—especially for first-time business owners or solo operators without a dedicated financial advisor.
Many Harness clients find that once they pass the $80K–$100K profit mark, the tax savings comfortably outweigh these costs—but only if the admin burden doesn’t slow down their business growth.
For support with filing, payroll set-up, and compensation strategy, Harness’s advisory team can help ensure you remain compliant—and efficient.
When should you not elect S-Corp status?
Not every LLC should rush to become an S-Corp—despite how appealing the tax savings may sound. In some cases, electing S-Corp status too early or without the right infrastructure can create more harm than good.
Here are the most common situations where an S-Corp election may not make financial sense:
1. You’re earning less than $80K in annual profit
This is the most cited threshold for a reason. Below this level, the tax savings are often wiped out by payroll costs, CPA fees, and administrative overhead. If you’re making $50K and spending $3,000 to maintain compliance, you’re likely breaking even—or worse.
2. You’re reinvesting most of your profits back into the business
If you’re not pulling much cash out for yourself, there’s less benefit to the S-Corp structure. It’s optimized for business owners who want to minimize self-employment tax on distributions, not those who are focused on scaling and reinvesting.
3. You’re expecting losses (or minimal profits)
S-Corp status won’t help if you’re not profitable. In fact, it can create friction. You’ll still be required to run payroll, file additional forms, and possibly pay state minimum taxes—even if the business is barely breaking even.
4. You need outside investors or equity partners
S-Corps have strict limitations:
- Only one class of stock
- No more than 100 shareholders
- All shareholders must be U.S. citizens or residents
That makes them less flexible than C-Corps when raising funds or structuring equity. If your business is planning to fundraise or offer stock options, remaining an LLC—or transitioning to a C-Corp—may be smarter.
5. You’re operating in a high-cost compliance state
Some states, like California or New York, impose hefty fees or taxes that dilute the S-Corp advantage. In those cases, the break-even threshold might be closer to $100K in profit. Local rules matter—and they vary widely.
Bottom line: Electing S-Corp status too early can mean you’re paying more for a structure you’re not fully benefiting from. The tax strategy has to fit your growth stage—not just your aspirations.
Ready to explore whether it’s the right time to elect? Use Harness’s Net Worth Tracking tool to model how different structures affect your long-term financial picture.
How Harness can help
Making the switch from LLC to S-Corp is a strategic decision that hinges on your profit levels and how you plan to pay yourself.
The $80K rule is a useful benchmark, but it’s not a one-size-fits-all answer. The right move depends on your specific circumstances: how your income flows, what state you operate in, and how involved you want to be in compliance. For many business owners, the tax savings are real—but so are the responsibilities that come with them.
If you’re unsure whether this is the right move for your business, you’re not alone. That’s exactly where strategic guidance makes a difference.
Get started with Harness today to explore how entity structure impacts your taxes—and how to align your business setup with your broader wealth strategy.
Disclaimer:
Tax-related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.
Content was prepared by a third-party provider and not the adviser. Content should not be regarded as a complete analysis of the subjects discussed. Although we believe the content is reliable, it is not guaranteed as to accuracy and does not purport to be complete nor is it intended to be the primary basis for financial or tax decisions.