INTERVIEW ON THE PRICE OF BUSINESS SHOW, MEDIA PARTNER OF THIS SITE.
Recently Kevin Price, Host of the nationally syndicated Price of Business Show, interviewed Alexander Paykin.
The Alexander Paykin Commentaries
S-corp elections are often marketed as a simple way to “save on taxes,” and for some businesses that is true. But the election is not a free tax cut, and it is not a set-it-and-forget-it choice. It is a tax classification with strict eligibility rules, real compliance duties, and a narrow set of circumstances where the benefits outweigh the burdens. The businesses that get into trouble usually do so because they chase the headline savings without adopting the discipline that makes those savings legitimate.
The usual S-corp pitch centers on the treatment of working owners. In an S-corp, an owner who performs services is generally expected to take a reasonable wage as an employee. Those wages are subject to payroll taxes and withholding. After wages, remaining profits may be paid as shareholder distributions, which are generally treated differently from wages for employment tax purposes. The theory is that not all business profit is compensation for labor; some profit is return on capital, risk, and enterprise. The problem is that some owners try to label most of the business’s income as “distribution” even though the business’s profits are driven primarily by the owner’s labor. That is where the IRS tends to focus. The more the company looks like a one-person services business with substantial earnings and minimal wages, the more exposed the structure becomes.
The practical question is not “How low can the salary be?” It is “What salary is defensible given the owner’s work?” The answer should come from real-world comparables, the owner’s responsibilities and hours, and how the company generates revenue. If the wage number is not grounded in reality, the savings are fragile. When distributions are reclassified as wages, the consequence is not just a theoretical adjustment; it can trigger back payroll taxes, penalties, interest, and years of corrective filings. Even without an audit, poor wage practices can create issues with unemployment insurance, workers’ compensation classifications, and general compliance.
Another common problem is that the S-corp election forces a business to treat money correctly, and many owners are not ready for that. Personal expenses paid from the business account can be treated as taxable wages or improper distributions, and in either case the paper trail matters. Reimbursements need a structured approach. Shareholder loans need documentation and repayment terms that reflect real lending. Distributions need to be tracked with attention to basis. When the entity is treated like a personal wallet, errors accumulate quickly, and the clean-up cost can exceed any tax benefit the election was supposed to produce.
S-corp eligibility rules also create hidden risk. The S-corp framework limits who can be a shareholder and imposes restrictions on how ownership economics can be arranged. Businesses that anticipate bringing on investors, issuing preferred equity, or creating special economic arrangements often discover too late that S-corp status cannot accommodate those plans. Ownership changes can also trigger issues in estate planning contexts if shares move into structures that require careful handling. These are not merely technicalities; a misstep can jeopardize S status and create cascading tax consequences.
State and local taxes can further complicate the decision. Some states require their own election or impose taxes and fees that reduce the benefit of federal S treatment. A business can run the numbers assuming federal savings, only to find that local rules change the economics. This is especially important for businesses operating across state lines or owners living in a different state than where the business operates.
A final misconception is confusing taxable profit with cash. S-corps are pass-through entities, and owners can owe tax on profits allocated to them even when the business does not distribute cash. That can be manageable with a thoughtful distribution policy, but without one it becomes a recurring conflict. It also matters for businesses that reinvest heavily, carry significant receivables, or have seasonal cash flow.
The S-corp election is most likely to be worth it when the business produces reliable profits above what would be a reasonable wage for the working owner, when the business can consistently run payroll and keep clean books, and when the ownership structure fits the eligibility rules now and in the foreseeable future. The safest path is to treat the election as part of an overall compliance system rather than a one-time form filing. That means implementing payroll from day one, documenting the reasonable compensation analysis, keeping formalities and records current, tracking basis and distributions throughout the year, and planning ahead for ownership changes.
S-corp elections can be highly effective, but only when the business is prepared to operate with the discipline the structure requires. If you want the upside, adopt the structure fully. If you do not, the election can create exposure that is worse than the tax you were trying to avoid.
