S-Corp Elections in 2025: Is It Still the Right Move for Your Small Business?

One of the most common questions I hear from small business owners in the Nashville area is some version of: "My accountant mentioned I should look at an S-Corp election — is that right for me?" It's a smart question. The S-Corp election is a powerful tool, but it isn't right for everyone, and the analysis is more nuanced than most people expect. Here's what I walk my clients through.

The Core Tax Benefit: Self-Employment Savings

Operating as a single-member LLC means all of your net profit is subject to self-employment (SE) tax — 15.3% on the first $176,100 of net earnings in 2025. With an S-Corp election, you pay yourself a reasonable W-2 salary (subject to payroll taxes) and take the rest as a distribution that bypasses SE tax entirely. For a business netting $120,000 or more per year, those savings can run $8,000–$15,000 annually.

The Qualified Business Income (QBI) deduction — still available in 2025 — adds another angle. A properly structured S-Corp, where W-2 wages are set correctly, can help maximize the QBI deduction for higher-income business owners. Getting that salary figure right takes both legal and accounting input.

The Salary Requirement — Get It Right

The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. This isn't optional. In my practice, I've seen clients set salaries too low and invite audits, and others set them so high that they wiped out the very savings the election was meant to generate. The right salary reflects market rates for the services you actually perform — and it needs to be documented. Payroll administration adds overhead, which is part of the cost-benefit equation every client should run before electing.

The Tennessee-Specific Angle

Tennessee has no personal income tax on wages or business distributions, which is already a significant advantage. But Tennessee does impose a Franchise and Excise (F&E) tax. The excise component — 6.5% on Tennessee net earnings — applies to LLCs and S-Corps alike, so it partially offsets the federal SE tax savings that drive most S-Corp elections. My clients in Florida and Texas face a similar no-personal-income-tax picture, though Tennessee's F&E tax is unique to this state and has to be factored in every time.

When It Makes Sense — and When It Doesn't

For most businesses netting $80,000 or more annually, an S-Corp election deserves a serious look. Below that threshold, payroll costs and additional compliance often exceed the savings. If you're planning to bring in investors, note that S-Corps cannot have more than 100 shareholders, are limited to one class of stock, and cannot have entity shareholders — making them incompatible with most venture capital structures. In those cases, a C-Corp organized in Delaware is usually the better path from day one.

The S-Corp election is a tool, not a universal solution. Used correctly and maintained properly, it can put real money back in your pocket every year.

If you'd like to talk through whether an S-Corp election makes sense for your business, I offer free consultations. Call me at 615-829-6181 or email forest@foresthamiltonlaw.com — I'm glad to help you run the numbers.