S-Corp Attorney
Delina Yasmeh advises California business owners on S-Corp elections, salary structuring, and the California-specific tax math that most “just elect S-Corp” advice ignores.
Get Started →The tax savings are real. So is the California franchise tax.
Self-employment tax is 15.3% on the first $168,600 of net income and 2.9% above that. An S-Corp allows you to split your income into two buckets: salary (subject to SE tax) and distributions (not subject to SE tax). The savings come from the distribution portion.
California adds a layer that every online calculator ignores: a 1.5% franchise tax on S-Corp net income, with a minimum of $800. For lower income levels, this tax erodes a significant portion of the federal SE tax savings. The breakeven in California is higher than it is in most other states.
The other factor most people overlook is the reasonable salary requirement. The IRS has successfully challenged S-Corp owner-employees who pay themselves below-market salaries to maximize distributions. Getting the salary structure right, not just filing the form, is the actual work, and the Reasonable Compensation Memorandum is the document that backs it up under audit.
If you are currently operating as a California LLC, the S-Corp election does not require you to change your entity. Your LLC can elect to be taxed as an S-Corp while retaining its legal structure, and Delina advises on this distinction regularly.
S-Corp strategy from election through ongoing compliance.
S-Corp Election Timing
The federal election generally must be filed within two months and 15 days of the start of the tax year, or anytime in the prior year. Miss it and you spend another year in the wrong structure. Delina advises on timing and handles the IRS Form 2553 filing, including late-election relief where there is reasonable cause.
Reasonable Compensation Memorandum
The IRS can recharacterize distributions as wages if your salary is unreasonably low. The memorandum is the document the IRS reads first if the election is ever examined: it grounds a defensible salary range in the factors the courts apply and in industry comparables. Most S-Corp owners do not have one.
When the Election Fits, and When It Doesn’t
For a solo professional above roughly $150,000 in net income, the election often saves $15,000–$20,000 a year. Below the breakeven, payroll, compliance, and California’s franchise tax can exceed the savings. If you plan to raise outside investment or sell soon, the election can complicate the structure. Delina tells you when to wait.
California-Specific Tax Modeling
California imposes a 1.5% franchise tax on S-Corp net income, with an $800 minimum, on top of federal obligations. The state breakeven is higher than the federal one. Delina models the actual numbers for your income level before recommending the election.
Payroll Setup & Compliance Calendar
After the election you become an employee of your own corporation and must run payroll. Delina coordinates federal and state withholding, the quarterly and annual payroll filings, the W-2 and W-3, and the federal and state S-Corp returns, then delivers a compliance calendar your CPA and payroll provider can run.
S-Corp vs. Sole Proprietorship & LLC
A sole proprietor pays self-employment tax on all net income; an S-Corp owner pays it only on salary. An LLC is a legal entity, the S-Corp is a federal tax election, and an LLC can elect S-Corp treatment to combine liability protection with the tax structure. At $150,000 in net income the difference can exceed $12,000 a year after California’s franchise tax.
What most people want to know.
Is an S-Corp worth it in California?
It depends on your net income. California charges a 1.5% franchise tax on S-Corp net income, which offsets some of the federal self-employment tax savings. The general breakeven in California is around $80,000 to $100,000 in net business income. Below that threshold, the administrative costs and California tax may exceed the savings. Delina models this specifically for each client before advising on the election.
What is the difference between an S-Corp and a sole proprietorship?
A sole proprietor pays self-employment tax (15.3%) on all net business income. An S-Corp owner-employee pays SE tax only on their salary, not on distributions. The entity structure also affects liability protection, investor eligibility, and the ability to bring in co-owners. These are not the same choice dressed up differently. They are structurally distinct with different consequences.
Do I need an attorney to elect S-Corp status?
The IRS Form 2553 can be filed without an attorney, but the election decision itself requires analysis of your income level, California tax treatment, reasonable salary requirements, and how the change affects your existing entity structure. Filing the form is straightforward. Knowing whether you should file it, and when, is where legal advice matters.
Further reading on s-corp strategy.
Is owning an S Corp considered self-employed?
Is an S corporation a sole proprietorship? No — and the difference affects every dollar you pay in self-employment tax. Learn what S corp ownership actually means.
Is S Corp the same as sole proprietorship?
Is S corp and sole proprietor the same thing?
Is an S Corp still considered an LLC?
What is the 2% rule for S corp?
What tax structure is best for LLC?
What type of business is an S Corp?
Ready to know if the S-Corp election actually makes sense for you?
The internet says “elect S-Corp and save on taxes.” Delina gives you the actual math. Tell us your situation, model the real numbers for your income level and entity structure.
Get Started →