S-corps and Largemouth Bass
Happy New Year! In this first edition of The Flying Point Update for 2026, we're going to talk about the S-corp election, walk through the math on when it actually makes sense, and learn about largemouth bass (Yes, in the winter).
Consider this fair warning: there are more numbers in this edition than you might have come to expect from this newsletter. That said, I think understanding S-corps is important, particularly for small business owners. Keep in mind that this is a simple overview of a topic that people write books on. And yes, the books are every bit as thrilling as you might imagine…
Top of Mind
January is when I start getting questions about S-corp elections. It's always a hot topic in small business tax planning, and for good reason. The potential payroll tax savings can be substantial. But after working with small business owners for years, I've learned that the S-corp conversation is rarely as simple as the online advice makes it sound.
The pitch is compelling: elect S-corp status, pay yourself a reasonable salary, and take the rest of your profits as distributions that aren't subject to self-employment tax. At a 15.3% self-employment tax rate, the savings can add up quickly. It's no wonder this is such popular advice.
Here's what the online advice often glosses over: S-corps come with real costs and complexity. You'll need to run payroll, which means payroll software fees, quarterly payroll tax filings, year-end W-2s, etc. You have to file a separate s-corp tax return and your personal return becomes more complicated, which means higher preparation fees. You'll need to maintain reasonable compensation documentation, track shareholder basis, and ensure proper corporate formalities. Some states impose additional S-corp taxes or fees. And if you don't get the reasonable compensation piece right, you're creating audit risk.
None of this means S-corps are bad. In fact, they're hugely valuable for the right situations. The key is understanding whether the tax savings justify the added complexity and expense for your specific business. I've seen business owners save thousands annually with a well-structured S-corp. I've also seen business owners spend more on compliance costs than they save in taxes.
This is a great example of the principle I discussed in Running Your Own Race and Fireflies. Just because a tax strategy works well for someone else doesn't mean it's right for your situation. The S-corp that saves your friend $8,000 per year might cost you money if your profit level doesn't support it. To be clear, I'm not anti-S-corp. I'm just pro-doing-the-math-first.
Worth Knowing
The S-corp math is reasonably straightforward once you understand the moving pieces. Let me walk through a simplified example that illustrates when the election starts making sense.
Imagine a consulting business generating $120,000 in net profit. As a single-member LLC (taxed as a sole proprietorship), you'd pay self-employment tax of about $17,000 on the full amount (15.3% on the first ~$176,100 of self-employment income in 2025, with a small calculation adjustment). You'd also be entitled to the Qualified Business Income (QBI) deduction of up to 20% of your business income, reducing your taxable income.
Now imagine electing S-corp status and paying yourself a $70,000 salary (a hypothetical reasonable wage for a consultant with your experience). You'd pay payroll taxes of about $10,710 on the salary (7.65% employer portion plus 7.65% employee portion). The remaining $50,000 flows through as a distribution with no additional payroll tax.
At first glance, that's roughly $6,200 in payroll tax savings. But now factor in the costs. Payroll can easily cost $500-1,000 per year. The additional complexity of an S-corp return typically adds $1,200-1,500 to your tax preparation fees. Plus, you’ll likely need some help throughout the year managing the now more complicated accounting. Add it all up, and you might be looking at easily $3,000 or more in additional annual costs.
There's another wrinkle: the Qualified Business Income (QBI) deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. For service businesses above certain income thresholds, this wage limitation matters. Paying yourself a higher salary increases your QBI deduction capacity, which partially offsets the payroll tax savings from keeping salary low. The optimization isn't as simple as minimizing salary.
The rough rule of thumb I use: the S-corp conversation becomes genuinely interesting when net business profit consistently exceeds $100,000-120,000. Below that threshold, the compliance costs often eat up most or all of the tax savings. Above that threshold, the savings typically outpace the costs by a comfortable margin.
But rules of thumb are just starting points. The actual break-even depends on your state's tax treatment, your specific compliance costs, your income level (which affects QBI limitations), and what counts as reasonable compensation in your industry. This is exactly the kind of analysis that's worth doing carefully before making the election.
If you're considering an S-corp election for 2026, the deadline to file Form 2553 is March 15th for calendar-year businesses. That gives you a couple months to run the numbers and make an informed decision.
Mark Your Calendar
January 15th: Q4 2025 estimated tax payments are due. If you've been making estimated payments throughout the year, this is your final installment for 2025.
January 31st: This is a big one. It's the deadline to issue W-2s and 1099s to employees and contractors. This deadline really sneaks up on people, especially coming right after the holidays. If you haven't already reviewed your vendor list for 1099 requirements, do it now. You need a W-9 on file and accurate mailing addresses for anyone you paid $600 or more for services during 2025. Missing this deadline can result in penalties, and tracking down vendor information in a panic is no way to start the year.
March 15th: S-corp and partnership tax returns are due (or extensions). This is also the deadline to file Form 2553 if you want to elect S-corp status for 2026.
Maine Wildlife Facts
Over the holiday break, the boys and I went ice fishing. It is a lot of standing around in the cold waiting for something to happen. Just about when the boys were ready to give up on me, a flag went up and we pulled in decent sized largemouth bass through the ice. Needless to say, the boys are hooked on ice fishing now. That pun is entirely intended.
Here are some interesting facts the naturalist team uncovered: despite being in just about every major lake in Maine, largemouth bass aren't actually native to the state. They were introduced to the state in the late 1800s and have since become one of our most popular game fish. Native to the central and eastern United States, they've expanded their range significantly through stocking programs and now thrive in Maine's warmer ponds and lakes.
Largemouth bass are surprisingly active under the ice, though they're much slower and more lethargic than during summer months. They don't hibernate like some people assume. Instead, their metabolism slows dramatically in cold water, and they conserve energy by moving less and eating less frequently. When they do feed, they're opportunistic, which is why patient ice anglers can still catch them.
The boys were fascinated to learn that largemouth bass can live over 15 years and that the Maine state record is a 11 pound, 10 ounce fish caught in 1968. They can eat prey up to half their own body length, including smaller fish, frogs, crayfish, and even small birds or mice that fall into the water. Their name comes from their enormous mouths, which extend past their eyes when fully opened.
For anyone considering ice fishing this winter, Maine's ice fishing season runs through March, and you'll need a valid fishing license. Always check ice conditions carefully. Four inches of clear ice is generally considered safe for walking, but conditions vary widely across different water bodies and throughout the season.
These Maine wildlife facts have been brought to you by Will (7) and Frank (4), Flying Point Advisors' on-staff naturalists.
A rare view of our naturalist team in action
Questions about any of this? Just reach out - I read every email and love hearing from you. Thanks for reading. You'll hear from me again in about two weeks.
-Mike
Disclaimer
The Flying Point Update is provided for general educational and informational purposes only. The content in this newsletter reflects my thoughts and observations on tax, accounting, and financial planning topics, but should not be considered personalized tax, accounting, or investment advice for your specific situation.
Tax laws are complex and change frequently. The information presented here is based on current tax law as of the publication date and represents general concepts that may not apply to your circumstances. Every individual and business has unique factors that affect their optimal tax and financial planning strategies.
Before making any financial decisions or implementing any tax strategies discussed in this newsletter, please consult with a qualified tax professional, CPA, or financial advisor who can evaluate your specific situation. If you'd like to discuss how any of these topics might apply to your circumstances, I'm always happy to chat.