Should I Elect S-Corp Status? A Guide for PNW Founders

If you're a founder in Washington or Oregon making over $60K in net income, you've probably heard whispers about S-Corp election. Maybe your accountant mentioned it, or a fellow founder told you they're "saving thousands" on taxes.

But should you actually elect S-Corp status?

The short answer: it depends. Let's break down when it makes sense, when to wait, and how to calculate your potential savings.

What Is S-Corp Election?

S-Corp election is a tax designation (not a business entity type) that changes how your LLC or corporation is taxed. Instead of paying self-employment tax on all your profit, you:

1. Pay yourself a "reasonable salary" (subject to payroll taxes)
2. Take remaining profit as distributions (not subject to SE tax)

The savings come from avoiding 15.3% self-employment tax on your distributions.

When S-Corp Makes Sense

You're likely a good candidate if:

• Net income consistently above $60-80K
• Predictable revenue and cash flow
• Ability to pay yourself a reasonable W-2 salary
• Willing to run payroll quarterly or monthly
• Multi-year business (not brand new)

The Math: Potential Savings

Let's look at a real example:

Scenario: $150K net income

As a sole proprietor (or disregarded LLC):

• Self-employment tax: $150K × 15.3% = $22,950
• Federal income tax: ~$23,000 (varies by deductions)
• Total tax: ~$45,950

As an S-Corp:

• Reasonable salary: $80K
• Distributions: $70K
• Payroll taxes on salary: $80K × 15.3% = $12,240
• Federal income tax: ~$23,000 (same)
• Total tax: ~$35,240

Savings: ~$10,710 per year

Note: This is simplified. Your actual savings depend on your specific situation, state taxes, and deductions.

WA vs. OR: State Differences

Washington

• No state income tax (distributions are tax-free at state level)
• B&O tax still applies to gross revenue
• S-Corp election is purely a federal SE tax play

Oregon

• State income tax applies to both salary and distributions
• Less dramatic savings than WA, but still significant
• Still worth it above ~$80K net income

When to Wait

Hold off on S-Corp election if:

• Net income below $50K (compliance costs eat the savings)
• Inconsistent or seasonal revenue
• You need high owner distributions (can't afford salary)
• Planning to raise venture capital (investors prefer C-Corp)
• First year in business (wait until you hit profitability)

The Reasonable Salary Requirement

The IRS requires you to pay yourself a "reasonable salary" for the work you do. Too low, and you risk an audit and penalties.

General rule of thumb:

• For service businesses: 40-60% of net income
• For product businesses: 30-50% of net income
• Must be comparable to what you'd pay someone else for your role

How to Elect S-Corp Status

1. Form 2553: File with the IRS (deadline: March 15 for current year, or within 75 days of formation)
2. State registration: Register with WA or OR if required
3. Payroll setup: Set up quarterly or monthly payroll
4. Bookkeeping: More complex than sole prop—consider professional help

Cost vs. Savings

Typical costs:

• Payroll processing: $50-150/month
• Accounting fees: Additional $200-500/month (more complex books)
• Annual tax return (1120S): $800-1,500

Break-even point: Usually around $60-80K net income

Our Recommendation

If you're making $80K+ in net income and have consistent cash flow, S-Corp election likely makes sense.

We offer a comprehensive S-Corp Analysis service ($500, credited if you sign up for monthly accounting) that includes:

• Tax modeling with your actual numbers
• Reasonable salary recommendations for WA or OR
• Break-even analysis
• Implementation roadmap

Learn more about our S-Corp Analysis service →

Common Mistakes to Avoid

1. Electing too early: Wait until you're consistently profitable
2. Salary too low: IRS red flag—pay yourself fairly
3. Missing payroll deadlines: Quarterly payroll taxes are non-negotiable
4. Poor bookkeeping: S-Corps require clean books for tax returns

Next Steps

1. Calculate your estimated net income for the year
2. Run the numbers (or use our S-Corp calculator)
3. Book a 20-minute intro call to discuss your situation
4. Make an informed decision with professional guidance

Book a 20-min intro call →

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Have questions about S-Corp election specific to your business? We'd love to help. FoxGlove CPA specializes in tax planning for PNW founders.