When does an S-corp actually save money?

Less than the pitch. The claim is 15.3% of everything you take as distributions, but three things shrink it: your salary isn't qualified business income, so the 20% QBI deduction falls; the structure costs real money to run — payroll service, a separate 1120-S return, and franchise tax in some states; and at higher incomes the Social Security wage base means much of that 15.3% was really 2.9% anyway. On $120,000 of profit with a $60,000 salary, the honest saving is roughly a third of the advertised one.

What you would have to pay someone else to do your job — supported by market data for your role, hours, and region. The IRS requires reasonable compensation before any distributions, and the audit cases are built on owners paying themselves a token salary atop large distributions. There is no safe-harbor percentage, but a salary below roughly a third of profit on a healthy solo business is the pattern that attracts attention. Document how you set it.

There is no magic number, because the break-even depends on your salary share, state, and running costs — which is exactly why folk thresholds like "$40k" or "$100k" disagree with each other. The honest method is to compute both scenarios with the QBI shrinkage and admin costs included and find where the savings cross zero. For many solo businesses that lands somewhere between $50,000 and $100,000 of profit, and the savings only become decisive well above it.

Running payroll for yourself (commonly $500–$800 a year), a separate corporate return — Form 1120-S — that most owners pay a preparer for, state franchise or entity taxes (California charges $800 minimum plus 1.5% of net income), and the ongoing discipline of payroll filings, reasonable-compensation documentation, and a real separation between business and personal money. None of these is ruinous; together they are why small profits rarely justify the election.

For a solo owner below the income thresholds, yes — and this is the most-skipped line in every S-corp pitch. The §199A deduction is 20% of qualified business income, and W-2 wages are not qualified business income, so every dollar you must take as salary removes twenty cents of deduction the sole proprietor would have kept. Above the thresholds the picture gets more complicated, and professional advice earns its fee.