What the S election does
A single-member LLC pays self-employment tax of 15.3% on essentially all net profit. Elect S-corporation treatment and the owner becomes an employee: wages carry payroll tax, and the remaining profit distributed to the owner does not. The saving is real. It is also smaller than the internet suggests, because the wages have to be reasonable compensation for the work performed, and reasonable compensation is not a token salary.
| Factor | Single-member LLC | S-corporation |
|---|---|---|
| Self-employment tax | 15.3% on net profit | Payroll tax on wages only |
| Federal return | Schedule C on your 1040 | Separate Form 1120-S plus K-1 |
| Payroll required | No | Yes — real payroll, real filings |
| Annual admin cost | Low | Meaningfully higher |
| Oregon CAT | Applies the same | Applies the same |
| Portland / Multnomah business taxes | Apply the same | Apply the same |
| Audit exposure | Standard | Reasonable compensation is a known focus area |
The rough test
- 1Is net profit consistently well above what you would have to pay yourself as reasonable compensation?
- 2Is the business stable enough that a bad year will not leave you paying payroll on money you did not make?
- 3Are you willing to run genuine payroll, on time, every period?
- 4Does the annual saving comfortably exceed the additional accounting, payroll and filing cost?
- 5Does the answer still hold once Oregon and local taxes are added, since the election does not touch them?
Where the answers are yes, the election is straightforwardly worth doing. Where profit is modest or erratic, it usually is not — and we will tell you that rather than sell you a structure.
What is reasonable compensation?
What you would have to pay someone else to do the work you do, in this market, with your qualifications. It is a facts-and-circumstances test, and the IRS has litigated it repeatedly. A salary set to minimize tax rather than to reflect the work is the position most likely to be challenged.
When do I have to elect?
S elections have timing rules — generally within a set window from the start of the tax year you want it to apply to, with relief available for late elections in some circumstances. Plan it rather than discovering the deadline.
Can I undo it?
Revoking an S election is possible but not casual, and there are consequences for re-electing later. Treat it as a multi-year decision.
What about a partnership?
Multi-member LLCs default to partnership treatment, which has its own planning around guaranteed payments and self-employment tax. Different analysis, same principle: run the numbers before you restructure.
Talk it through before filing season starts
Start with a complimentary 15-minute introductory call about your situation and whether we are a good fit. No tax advice is given on that call.
Written by
Enrolled Agent, Oregon Licensed Tax Consultant
License number: Enrolled Agent 00160070-EA · Oregon Licensed Tax Consultant 35746-C
Heather has spent more than a decade preparing individual and business returns across the Portland metro and the Columbia Gorge, and holds unlimited rights to represent taxpayers before the IRS.
Last reviewed
This page is general information about Oregon, Washington and federal tax rules, not advice about your own return. Thresholds and rates change every year. Figures were verified as of August 2026 — check the linked official sources, or talk to us about your situation.