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Why File an S-Corp Election
For many small businesses, electing S-corp status can meaningfully reduce self-employment tax. But it isn't right for everyone. This guide walks you through how the savings work, what's required, and how to know if it fits.
The Why
It's the Same Business Either Way. The Tax Bill is What Changes.
As a sole-member LLC, every dollar of profit gets hit with 15.3% self-employment tax (that's Social Security & Medicare). Elect S-corp status, and you split your profit into two buckets: a reasonable salary (which pays that 15.3%) and distributions (which don't).
That single change is where the savings come from. Here's the exact example many owners start with:
The "before." No salary, no payroll — the whole profit is self-employment income.
The "after." Pay yourself a reasonable salary; take the rest as distributions.
The only difference is how much profit got hit with the 15.3% — and that's money back in your pocket.
Simplified illustration using round tax rates for clarity. Your actual numbers depend on your salary, profit, and tax situation — that's what the calculator below is for.
Your S-Corp Savings Calculator
Enter your numbers to see roughly how much an S-corp election could save you each year. This is an estimate to show the shape of it — we'll model your exact situation together.
Estimate only. Uses a 15.3% self-employment/payroll rate and a 32% federal income rate for illustration. Real Social Security caps, brackets, and deductions will differ — federal income tax is unaffected by an S-corp election, so the savings come from the payroll side. Based on 2026 figures. We'll model your exact situation with your accountant.
What it Takes
Payroll Compliance Rules for S-Corps
Those savings come with responsibilities. The S-corp is a real structure with real requirements — but none of them are scary once someone's handling the paperwork.
Pay a reasonable salary
The IRS requires S-corp owner-employees to pay themselves a fair market wage for the work they do — before taking distributions. Too low is a red flag. You'll work with your accountant to determine what a reasonable salary is for your business.
Run formal payroll
That salary has to go through real payroll — with taxes withheld each pay period and a paystub every time. No more transferring money to yourself and calling it a day. Paper Trails works through all of the mechanics on your behalf.
File the payroll returns
Quarterly (federal Form 941, Maine withholding & unemployment) and annually (Form 940, W-2s, W-3). Deadlines are firm — but Paper Trails pays and files all of these taxes on your behalf.
File Form 2553
This is the actual "S-election" — the form that tells the IRS to tax your LLC as an S-corp. Timing matters, and your accountant will handle this for you.
File a separate return
The S-corp files its own tax return (Form 1120-S) and issues you a K-1. Your accountant will handle this for you — your personal return then picks up the salary (W-2) and the profit (K-1).
Sounds like a lot?
This is exactly the part we take off your plate. You focus on the business; we keep the S-corp compliant.
A Big Mindset Shift
Now You Wear Two Hats: Employer and Employee
The moment you run payroll for yourself, your business becomes an employer — and you become its employee. Both roles come with a job description.
You, the Employer
✓ Withhold and match Social Security & Medicare
✓ Pay federal & state unemployment taxes (FUTA & SUTA)
✓ Contribute to Maine Paid Family & Medical Leave
✓ File the payroll returns and carry workers' comp
You, the Employee
✓ Get a real paycheck on a set schedule
✓ Have income tax and your half of FICA Taxes withheld
✓ Receive a W-2 at year-end, just like any employee
✓ Take the rest of the profit as distributions
Employer Taxes, Explained
Being an employer means a handful of new taxes on top of the income tax you already know. The good news: they're small, and they're all calculated and paid for you. We explain each one below.
Rates and wage bases shown are recent examples and change year to year. We always apply the current figures — this is here to show you the shape of it.
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Funds federal unemployment programs · employer pays 100%.
FUTA is 6.0% on the first $7,000 of each employee's wages — but if you pay your state unemployment on time, you get a big credit that drops it to about 0.6%. That's roughly $42 per employee, per year. It's paid entirely by the business, never withheld from your paycheck. -
Paid to the Maine Dept. of Labor · employer pays 100%.
Maine charges unemployment tax on the first $12,000 of each employee's wages. Your rate is "experience-rated" — new employers start around 2% and it adjusts over time based on your claims history. Like FUTA, it's the business's cost, not withheld from your check.Good to know: because you're now a W-2 employee, you can generally claim unemployment benefits if the business ever can't pay you. -
New Maine program · split between employer & employee.
Maine's newest payroll contribution. Contributions began January 1, 2025. For small businesses like yours — fewer than 15 employees — the total contribution is 0.5% of wages, and you contribute that 0.5% as the employee (the business isn't required to add an employer share). Paid-leave benefits for workers start in May 2026.Good to know: because you're paying in as an employee, you can claim paid family & medical leave benefits yourself. We track it and remit it automatically. -
The 15.3% — split half employee, half employer.
This is the big one from the calculator. On your salary, 7.65% is withheld from your paycheck (your half) and the business pays a matching 7.65% — 15.3% total. As an LLC you paid the whole 15.3% yourself as "self-employment tax." As an S-corp, you only pay it on your salary, not on your distributions. That gap is the savings.
Two More Levers
Other Ways to Lower the Bill
Beyond the salary split, two moves can trim your taxes even further — and both run right through your payroll.
Health Insurance for >2% Owners
If you own more than 2% of your S-corp, health insurance the company pays for you gets a special, and slightly weird, tax treatment. Getting it wrong means you lose a valuable tax deduction, so it is worth understanding.
Premiums get added to your W-2
The premiums the business pays are added to your wages in Box 1 of your W-2—reported as income. Each November, we'll reach out to collect your total premiums paid through the business for the year, including health, dental, and vision, so it's reported correctly.
But they skip Social Security & Medicare
Here's the upside: those premiums are not subject to the 15.3% FICA or unemployment taxes—only income tax reporting.
You deduct them on your personal return
You then take the self-employed health insurance deduction on your personal return. This effectively offsets the income. The net effect is favorable, but only if it is reported correctly on the W-2. That is the part we make sure happens.
Retirement Plans: SIMPLE IRA or 401(k)
A retirement plan is one of the most effective moves available once you've made the S-corp election. It lets you set money aside for your own future while shrinking your federal and state income tax at the same time.
Add a 401(k) or SIMPLE IRA
Once you're running payroll, you can set up a 401(k) or SIMPLE IRA through the business. It's a natural next step after the S-corp election — and it works a lot like the health-insurance move above: you set money aside for yourself while lowering what you owe.
Lower your income tax
Contributions reduce your federal and state income tax. That's the core benefit — you're saving for your own future and shrinking this year's tax bill at the same time. It doesn't change your self-employment or payroll tax, but the savings stack on top of everything the S-corp election already does.
Already have a SEP IRA?
A SEP IRA can still work with an S-corp, but because owner contributions are based only on your W-2 salary, a 401(k) or SIMPLE IRA is often the better fit once you're on payroll. It's worth revisiting. Talk with your accountant and financial advisor about whether a switch makes sense for you.
Is an S-Corp Right for You?
Tick the ones that apply to your business. The more boxes, the more likely the S-election pays off for you.
Why Work with Paper Trails
Local Support, Real People
Work with a Maine-based team that understands your needs—no call queues, just real people ready to help.
Deep Industry Experience
We work with a variety of businesses in Maine and beyond and the surrounding states, from 3-employee mom and pops to 300 employee multi-location operations.
Hands-On Implementation
From setup to staff training, we’re there every step of the way to ensure a smooth transition and long-term success with your payroll and HR processes.
Educational Resources
We provide ongoing education through monthly webinars, practical blog articles, step-by-step checklists, in-depth eGuides, and isolved help videos—giving you and your employees the tools to stay informed and confident.
Regulatory Expertise
Our team stays on top of local, state, and federal mandates, ensuring you're always prepared for audits or legislative changes.
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What clients are saying about the team at Paper Trails
Our company switched from a mega payroll company to Paper Trails and we are so happy we did! The staff are extremely knowledgeable, professional and helpful! It's wonderful to have a local person you can pick up the phone and call if you have a question or a problem. Would highly recommend!!
Wendi Saracino
D&C Home Care
We began with Paper Trails at the beginning of 2020 and have never once regretted the decision. Jeff, Chris, and Teresa have all made the process amazingly seamless which has let us focus on so many other important things to continue to grow our business. Paper Trails has saved me countless hours and headaches over the last few years. Congdon’s Doughnuts is better equipped for future growth thanks to Paper Trails.
Jillian Shomphe
Congdon's Doughnuts
