When to File for an S Corp Tax Election: What You Need to Know (2024)

As a construction business owner, maximizing your profit should always be top of mind. However, taxes can significantly impact how much of your hard-earned money you actually get to keep.

Let’s take a closer look at how electing to have your company taxed as an S-Corporation can significantly reduce your taxes. I’ll also discuss when the right time to make that change is.

How an S-Corp tax election saves you in taxes

There are two key factors that lead to tax savings when electing an S-Corp tax election: The Qualified Business Income (QBI) deduction and a reduction in self-employment taxes.

When you elect S-Corp status, your tax liability decreases primarily because you pay self-employment taxes only on the salary you draw from the business, not on the entire profit.

So let’s assume you take half of your profit as a reasonable salary. The remainderis distributed as capital gains income, which isn’t subject to self-employment taxes. Currently, the self-employment tax rate is 15.3%, so by reducing the amount subject to this tax, you can see significant savings.

So when does it make sense to make this change?

We’ve determined that for most of our construction and home service clients, the right time to make the S-Corp tax election is when your business reaches $80,000 in net income.

When you reach $80,000 in profit, if you’re operating as a self-employed contractor, filing jointly as a married couple, you could expect to keep around $64,244 after taxes, without an S-Corp tax election in place. But by electing S-Corp status for your LLC, you could keep $68,501—a savings of approximately $4,300 in taxes. Nice, right?

But with the QBI deduction in place, there’s typically no point in electing S-Corp status before your business hits $80,000 in profit because the additional compliance costs can outweigh the tax savings.

Extra costs such as payroll provider fees, increased tax preparation fees for filing a separate business return, and the administrative time required to manage compliance could possibly result in a net loss in tax savings if your profits are lower than $80,000.

Conclusion

Electing S-Corp status for your construction business could be a smart move that helps you keep more of your hard-earned money—once your profits reach $80,000 or more.

Interested in learning more? Reach out to a tax professional who can help you navigate the process and ensure you’re making the best financial decisions for your business. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. We assume upon the information contained herein.