Not every Denver business benefits from S-Corp election. Some actually lose money after factoring in the additional costs and complexity. Before you convert, run the numbers based on your specific situation.
Here's a simple framework to calculate whether S-Corp status will save your Denver business money.
If you're currently operating as a sole proprietor or standard LLC, every dollar of business profit gets hit with self-employment taxes. The rate is 15.3% on earnings up to $176,100 (the 2025 Social Security wage base according to the IRS). Above that amount, you still pay 2.9% Medicare tax with no cap.
Take your 2024 business net profit from Schedule C or your LLC tax return. Multiply by 15.3% (or 2.9% for the portion above $176,100). This is your current self-employment tax burden.
For example, if your Denver business made $100,000 in profit last year, you paid $15,300 in self-employment taxes. This is money you could potentially save with S-Corp status.
Our tax reduction planning services help Denver business owners calculate their exact current and projected tax burden.
With S-Corp status, you split income between salary and distributions. According to IRS S-Corp compensation rules, you must pay yourself a reasonable salary, which is subject to employment taxes. The remainder can be taken as distributions, which avoid employment taxes.
Let's use that $100,000 profit example. You determine that a reasonable salary for your role in the Denver market is $60,000. Here's the new calculation: $60,000 salary × 15.3% = $9,180 in employment taxes. The remaining $40,000 in distributions has zero employment tax. Your total employment taxes drop from $15,300 to $9,180. That's $6,120 in annual tax savings.
S-Corp status isn't free. You'll incur several additional costs. Payroll processing typically costs $1,200 to $2,400 annually. Additional CPA fees for Form 1120-S preparation run $800 to $1,500 annually. State filing fees in Colorado are minimal, around $50 to $100 per year.
Total additional costs: approximately $2,050 to $4,000 annually.
Using our example, $6,120 in employment tax savings minus $3,000 in additional costs (midpoint estimate) equals $3,120 net annual savings.
That's decent savings, but not earth-shattering. This is why many CPAs suggest waiting until you're making at least $60,000 to $80,000 before converting to S-Corp status.
Here's how the math works at different profit levels for a typical Denver service business (assuming a 50/50 salary-distribution split):
$40,000 profit: Employment tax savings of $3,060. After $3,000 in costs, net savings of $60. Not worth it.
$60,000 profit: Employment tax savings of $4,590. After $3,000 in costs, net savings of $1,590. Borderline worthwhile.
$80,000 profit: Employment tax savings of $6,120. After $3,000 in costs, net savings of $3,120. Starting to make sense.
$100,000 profit: Employment tax savings of $7,650. After $3,000 in costs, net savings of $4,650. Definitely worthwhile.
$150,000 profit: Employment tax savings of $11,475. After $3,000 in costs, net savings of $8,475. Strong savings.
$200,000 profit: Employment tax savings of $15,300. After $3,000 in costs, net savings of $12,300. Excellent savings.
These calculations assume you can justify a 50/50 salary-distribution split based on market rates for your industry. Your actual split might be different depending on your specific circumstances.
Some industries justify lower salary percentages, which increases S-Corp savings. E-commerce businesses with substantial inventory and systems can often justify 30-40% salary. Real estate investors with significant property holdings might justify 25-35% salary. Product-based businesses with employees handling most operations can justify 35-45% salary.
Other industries require higher salary percentages, which reduces S-Corp savings. Professional services where the owner is the primary service provider typically need 50-60% salary. Medical practices with owners seeing patients need 55-65% salary. Law firms with owner-attorneys billing clients need 50-60% salary.
Use our S-Corp strategy guide to understand how your specific industry affects the salary calculation.
The Qualified Business Income (QBI) deduction adds complexity to the S-Corp calculation. You can deduct up to 20% of your qualified business income, but the deduction is limited by W-2 wages and qualified property.
For S-Corp owners, a salary that's too low can reduce your QBI deduction, partially offsetting your employment tax savings. Conversely, a higher salary increases your QBI deduction but increases employment taxes.
The optimal split balances employment tax savings against QBI deduction maximization. This requires modeling multiple scenarios. Our tax strategy services include QBI optimization modeling for Denver S-Corp clients.
If you have W-2 income from another job, your S-Corp savings calculation changes. Once your combined W-2 wages exceed $176,100 (the 2025 Social Security wage base), you've already maxed out Social Security taxes. Additional S-Corp salary only faces the 2.9% Medicare tax.
This dramatically reduces S-Corp savings. If you earn $150,000 in W-2 wages from a day job and your side business makes $100,000, your S-Corp employment tax savings are much smaller because most of your S-Corp salary would only face 2.9% Medicare tax, not the full 15.3%.
If you run your Denver business part-time while working a full-time W-2 job, you might justify a lower S-Corp salary percentage. The IRS looks at time and effort devoted to the business when determining reasonable compensation.
If you work your business 15 hours per week, you might justify a salary that's only 30-40% of profit. This increases your S-Corp savings compared to a full-time owner-operator.
We've built a simple formula you can use to estimate S-Corp savings for your Denver business. Take your net business profit, multiply by 0.50 to estimate reasonable salary (adjust based on your industry), multiply that salary by 0.153 to calculate employment taxes, multiply the distribution portion (profit minus salary) by 0.153 to calculate employment tax savings, and subtract $3,000 in estimated additional costs.
If the result is positive and exceeds $2,000, S-Corp election probably makes sense. If it's under $1,000, the administrative burden might not be worth the modest savings.
Colorado has a flat 4.40% income tax rate for 2026. The state doesn't have separate S-Corp taxation rules. Your S-Corp income flows through to your personal Colorado return and gets taxed the same whether you're an LLC or S-Corp.
This means your S-Corp decision is purely about federal self-employment tax savings. Colorado state taxes are neutral in the calculation. This simplifies the analysis for Denver business owners compared to states with complex S-Corp tax rules.
Don't convert to S-Corp if your business profit is under $50,000 annually (savings won't justify the costs). Your business profit fluctuates wildly year to year (can't maintain consistent salary). You're planning to sell the business soon (S-Corp status complicates business sales). You need to bring in outside investors (S-Corp has shareholder restrictions). Your business regularly operates at a loss (no profit to avoid employment taxes on).
These calculations are estimates based on typical situations. Your actual savings depend on your specific profit level, industry and role, ability to justify a particular salary-distribution split, other income sources, QBI deduction status, and additional state or local tax considerations.
At Succentrix, we provide personalized S-Corp analysis for Denver business owners. We review your last two years of tax returns, research market salaries for your specific role and industry, model different salary-distribution scenarios, calculate employment tax savings and QBI impacts, factor in additional costs, and provide a clear recommendation with exact savings projections.
Most clients are surprised by the results. Some expect huge savings and learn the administrative burden isn't worth the modest tax reduction. Others assume S-Corp won't help and discover they could be saving $8,000+ annually.
Here's our rule of thumb for Denver businesses: if you made under $50,000 in profit, stay as an LLC. Between $50,000 and $70,000, run the numbers but S-Corp might not be worth it. Between $70,000 and $100,000, S-Corp usually saves money but verify based on your industry. Above $100,000, S-Corp almost always makes sense unless you have unusual circumstances.
If you're ready to find out if S-Corp election will save your Denver business money, schedule a consultation with our team. We'll run your specific numbers, show you exactly what you'd save, and help you implement S-Corp status if it makes sense. Don't continue overpaying in self-employment taxes when a simple tax election could save you thousands every year.
