CLIENT CASE STUDY
S Corp Election Tax Savings: How One Couple Cut Their Tax Bill by $40,000 to $50,000 a Year
A contractor and a self-employed designer. Two businesses, no real bookkeeping, and a tax bill far bigger than it needed to be. Here is what we found and what we changed.
Written and reviewed by Paul Belshaw, MSCTA — in tax and accounting since 1978.
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Case Study at a Glance
CLIENT - Married couple, both self-employed — a construction contractor and a graphic designer
BUSINESSESS - A construction contracting business, and a self-employed graphic design practice
HOW THEY WORK WITH US - Virtual-first hybrid
STARTING POINT - Almost no bookkeeping. What existed was unusable. Both businesses taxed as single-member LLCs.
THE PROBLEM - Paying income tax and full self-employment tax on every dollar of profit in both businesses
WHAT WE DID - Cleaned up the books, built complete financial statements, elected S corporation status for both businesses, set up payroll with reasonable compensation, added qualified retirement plans
THE RESULT- About $40,000 to $50,000 in tax savings per year
Every business is different. This is one client's outcome, not a promise of what you would save. Your result depends on your income, your structure, and your situation.
The Short Version
A married couple came to us with two self-employed businesses, no usable bookkeeping, and a lot of stress about taxes. He runs a construction contracting business. She runs her own graphic design practice. We cleaned up the books first. Once the financial statements were accurate, we could see what the numbers had been hiding. Both businesses were paying full self-employment tax on every dollar of profit, and neither one needed to be. We elected S corporation status for both, set up payroll, calculated reasonable compensation for each owner, and added qualified retirement plans. The S corp election tax savings, combined with the other strategies, came to roughly $40,000 to $50,000 a year.
The order mattered more than any single move. None of it was visible until the books were right.
Where They Started: Two Businesses, No Books They were doing well. That was not the problem.
He ran a construction contracting business. She ran her own graphic design practice. Both were making real money. Neither one had bookkeeping worth the name, what existed was a mess, and most of it was missing.
For a contractor, that gets expensive fast. Trucks, equipment, fuel, materials, subcontractors, equipment loans, money moves in every direction all year long. When nobody is tracking it properly, what you end up with is a pile of receipts and a bank balance. Neither one tells you what you actually made.
So every spring was the same. They did not know what they had earned until the year was over. They did not know what they owed until it was too late to do anything about it. And they worried about it the whole year in between. That is the part people do not talk about enough. The tax bill is one thing. Not knowing is worse. For tax purposes, both businesses were single member LLCs. That is a fine place to start a business. It is not always the right place to stay.
"They came to us with the perfect storm. A lot of issues, a lot of problems, and a lot of anxiety." — Paul Belshaw, MSCTA
Step One: We Fixed the Books
We did not start with tax strategy. We started with the books, because there was no way to build a strategy on numbers we could not trust.
Cleaning up meant rebuilding, not tidying. When we were done, both businesses had what we consider complete financials:
A real balance sheet, not just a profit and loss statement
A fixed asset schedule with depreciation
A loan amortization schedule
Payroll with the payroll tax detail broken out
Auto expenses, journal entries, and trade-ins handled correctly
On a contracting business, that list is not academic. He had trucks and equipment that belonged on a fixed asset schedule with real depreciation, and were not on one. He had equipment loans where nobody had ever split the payments between interest and principal. That meant the balance sheet was wrong, and so was the deduction. He had work trucks, mileage, and a trade-in that had been handled incorrectly.
Those five pieces are the ones a bank feed cannot produce on its own, and they are exactly the pieces a tax preparer needs. We do the bookkeeping and the tax return under one roof, so the books get built the way the return needs them from the start. That is not a small distinction. It is the reason the next step was even possible.
What the Clean Books Revealed
Once the financial statements were accurate, the problem was obvious in about ten minutes.
Both owners were paying income tax and full self-employment tax on every dollar of profit their businesses made. That is how a single-member LLC works by default. All of the profit is treated as self-employment income, and all of it carries self-employment tax on top of regular income tax.
With two profitable businesses, that was a lot of money going out the door for no reason other than the way the entities were set up. They had no idea. Not because they were careless, but because nobody can see that in a truck full of receipts. It only becomes visible when someone builds a real balance sheet and a real profit and loss statement and looks at the whole picture.
That is the argument for clean books in one sentence: you cannot save money on a tax bill you cannot see.
Step Two: We Elected S Corporation Status for Both Businesses
An S corporation election changes how a business is taxed. It does not change what the business does, who owns it, or how it operates day to day. The LLC stays an LLC. Only the tax treatment changes. Here is what changes that matters. In a single-member LLC, all of the profit is self-employment income. In an S corporation, the owner becomes an employee of their own business and takes a salary. That salary is payroll. The rest of the profit is distributed to the owner and distributions are not subject to self-employment tax.
We filed the elections for both businesses and handled the conversion from start to finish. His contracting business and her design practice both became S corporations.
This is not automatic, and it comes with obligations. An S corporation has to run real payroll, file payroll tax returns, and file its own tax return every year. It is more work. When the numbers support it, it is worth the work by a wide margin. When they do not, we say so.
When does an S corp election make sense? It depends on your profit, what you would pay yourself, and what the extra filings cost you. There is no universal number. That is a conversation, not a calculator and it is exactly what a 15-minute call is for.
Step Three: Payroll and Reasonable Compensation
An S corporation owner cannot simply take everything as a distribution. The IRS requires the owner to pay themselves reasonable compensation for the work they actually do, a real salary, through real payroll, with real payroll taxes. Set it too low and the election draws attention. Set it too high and you give back the benefit you just created. Getting it right is the difference between an S corporation that works and one that becomes a problem.
For a contractor this takes some thought, because the owner usually wears two hats. He runs the business, and he also does the work. Both of those have a market value. Reasonable compensation has to reflect what he actually does, not a round number somebody picked because it sounded safe. We calculated reasonable compensation for both owners based on their roles and their actual work, set up payroll for each business, and have run it since. That kind of judgment call, what to pay yourself, and why, is exactly what our business advisory services are built around.
Step Four: Qualified Retirement Plans
With payroll running and clean numbers to work from, we set up qualified retirement plans for both owners. These plans do two jobs at once. Contributions are tax deductible, so they lower the current tax bill. And the money is theirs, it goes into their own retirement, not to the IRS. That is the rare strategy where the tax savings and the long term benefit point in the same direction.
None of this was available to them before. A retirement plan needs payroll. Payroll needed the S corporation election. The election needed accurate financial statements. The financial statements needed clean books. Four steps, in that order, every time.
Where They Are Now
About $40,000–$50,000 saved a year
The S corporation elections plus the other strategies, together, every year going forward
Books they can actually use
Monthly bookkeeping and accurate financial statements for both businesses. They know where they stand without waiting for tax season.
Retirement money instead of tax money
Qualified plans for both owners, funded with dollars that used to go to the IRS.
The number is the headline. The part they mention is the sleep.
They came to us stressed out and worried, carrying a problem they could not see the shape of. Now they know what their businesses are doing, they know what they owe, and they know somebody is watching it. That is a different way to run a business, and it is a different way to live.
Every business is different. This is one client's outcome, not a promise of what you would save.
Case Study FAQs
What is an S corporation election?
An S corporation election changes how a business is taxed, not what it is. The business keeps its legal structure. The election tells the IRS to tax it under a different set of rules, where the owner takes a salary through payroll and the remaining profit is distributed.
Can an LLC be taxed as an S corporation?
Yes. An LLC can elect to be taxed as an S corporation and remain an LLC. This is one of the most common structures we set up. The legal entity does not change, the operating agreement does not change, and the business keeps its name. Only the tax treatment changes.
Does an S corporation election lower self-employment tax?
It can, because distributions from an S corporation are not subject to self-employment tax the way LLC profit is. How much it helps depends on your profit, your reasonable compensation, and what the added filings cost. It is worth running the numbers before assuming either way.
What is reasonable compensation for an S corporation owner?
Reasonable compensation is the salary an S corporation owner must pay themselves for the work they actually do in the business.** It has to reflect the role, the hours, and what a similar job would pay. Setting it too low invites scrutiny. Setting it too high gives back the benefit. We calculate it and document how we got there.
Do I need clean books before electing S corporation status?
Yes — you need accurate financial statements before you can tell whether the election makes sense.** The decision turns on real profit numbers. Without a balance sheet and an accurate profit and loss statement, you are guessing at a decision that affects every year going forward.
Can I put my child on payroll in my business?
You can, when the child is old enough to do real work for the business and the pay matches that work.** Documentation matters here more than almost anywhere else — the work, the hours, and the rate all need support. Because wages are earned income, a child on payroll may also be able to fund a Roth IRA. Done properly it is legitimate. Done casually it is a problem.
How long does it take to clean up a year of messy books?
It depends on the volume of transactions and how much documentation still exists. We scope it after we look at what you have, and we quote a fixed fee before we start so there is no open-ended bill. Most owners are further along than they think once someone sorts it.
Do you work with contractors and construction businesses?
Yes. Contractors and trades businesses are a large part of what we do. We also work with self-employed professionals, service businesses, and creative practices across Florida and beyond. We are virtual-first hybrid, so where you are located is not a limit on working together.