Most accountants won't give you a straight answer about when to convert to an S-Corp. They'll say "it depends" and leave you confused. But there's actually a pretty clear income threshold where S-Corp conversion starts saving Denver business owners serious money.
After helping hundreds of Colorado small businesses with tax reduction planning, we've found that the magic number sits around $60,000 to $80,000 in net profit. Below that, the juice probably isn't worth the squeeze. Above that, you're likely leaving thousands of dollars on the table.
Converting to an S-Corp costs money and creates work. You need to run payroll, which typically costs $1,200 to $2,400 per year for a basic payroll service. You need to file a separate corporate tax return (Form 1120-S), which usually adds $800 to $1,500 to your annual accounting fees.
So right away, you're looking at $2,000 to $4,000 in additional annual costs. For S-Corp conversion to make sense, your tax savings need to exceed these costs.
Here's the math: self-employment taxes hit you at 15.3% on earnings up to $176,100 (the 2025 Social Security wage base according to the IRS). If you convert to an S-Corp and split your income 50/50 between salary and distributions, you avoid 15.3% taxes on the distribution half.
At $60,000 in profit, splitting this $30,000/$30,000 saves you about $4,590 in self-employment taxes (15.3% of $30,000). Subtract your $2,000 to $4,000 in additional costs, and you're netting $590 to $2,590 in actual savings. That's decent, but not earth-shattering.
At $100,000 in profit, using a similar split saves you $7,650 in self-employment taxes. Now you're netting $3,650 to $5,650 after costs. Much better.
If you're running a standard LLC in Denver (or operating as a sole proprietor), every dollar of profit gets hit with self-employment taxes. The IRS self-employment tax is 15.3% total, broken into two parts: 12.4% for Social Security and 2.9% for Medicare.
Social Security taxes max out once you hit the wage base ($176,100 for 2025). But Medicare taxes never stop. There's even an additional 0.9% Medicare tax on earnings above $200,000 for single filers or $250,000 for married couples filing jointly.
Our Denver business CPA services help clients understand exactly how much they're paying in self-employment taxes each year. Most business owners are shocked when they see the actual dollar amount.
When you elect S-Corp status using IRS Form 2553, you split your income into salary and distributions. Your salary gets hit with the full 15.3% in employment taxes (though now it's split between you and your business, making it feel less painful). Your distributions avoid employment taxes entirely.
This is the key: distributions are not subject to self-employment taxes. The IRS allows this because you're already paying employment taxes on your reasonable salary portion.
But here's the catch: your salary must be "reasonable" according to IRS S-Corp compensation rules. You can't pay yourself $20,000 and take $180,000 in distributions if you're running a successful Denver business. The IRS will challenge that in an audit.
Your personal threshold depends on a few factors. First, what's your current net profit? Second, what's a reasonable salary for someone doing your job in your industry in the Denver area?
For example, if you're a Denver marketing consultant making $90,000 in profit, a reasonable salary might be $55,000 to $65,000. That leaves $25,000 to $35,000 in distributions. You'd save about $3,825 to $5,355 in self-employment taxes (15.3% of your distribution amount).
If you're a Denver contractor making $200,000 in profit, a reasonable salary might be $85,000 to $100,000. That leaves $100,000 to $115,000 in distributions. You'd save about $15,300 to $17,595 in self-employment taxes. Now we're talking real money.
Use our S-Corp strategy guide to understand how this calculation works for your specific situation.
Some industries hit the S-Corp threshold earlier than others. If you're in a high-margin service business (consulting, coaching, professional services), you might benefit from S-Corp status at lower profit levels because your reasonable salary is easier to justify as a smaller percentage of total income.
If you're in a lower-margin business (retail, food service, manual labor), you might need higher profits before S-Corp makes sense. The IRS expects you to pay yourself a competitive wage, and in some industries that means a higher salary relative to your total business income.
Here's something most Denver accountants miss: if you run your business part-time while working a W-2 job, your S-Corp threshold might be different. The IRS looks at how much time and effort you put into the business when determining reasonable compensation.
If you're working your Denver business 10 hours per week while holding down a full-time job, you might justify a lower salary percentage. This means you could benefit from S-Corp status at lower profit levels.
If you have W-2 income from another job, you might hit the Social Security wage base ($176,100 for 2025) without any S-Corp salary. Once you're above that cap, the self-employment tax savings drop from 15.3% to just 2.9% (Medicare only).
This changes your math. At higher income levels with W-2 wages already maxing out Social Security, your S-Corp savings are smaller. You might need $150,000+ in business profit to justify the S-Corp complexity if you're already earning $170,000 in W-2 wages.
Good news for Denver business owners: Colorado doesn't have separate S-Corp taxation rules that complicate this decision. The state uses a flat 4.40% income tax rate for 2026. Whether you're an LLC or S-Corp, your business income flows through to your personal return and gets taxed the same.
This means your S-Corp conversion decision is purely about federal self-employment tax savings, not about Colorado state tax benefits.
The Qualified Business Income (QBI) deduction adds another layer to this decision. You can deduct up to 20% of your qualified business income, but the deduction is limited by your W-2 wages and business property.
For S-Corp owners, only your salary counts as W-2 wages for QBI purposes. Set your salary too low to maximize self-employment tax savings, and you might reduce your QBI deduction. Set it too high to maximize QBI, and you're paying more in employment taxes.
Our tax strategy services help Denver business owners find the optimal balance between these competing factors.
Don't convert to S-Corp status if you're in any of these situations: your business is barely profitable or inconsistently profitable, you're in startup mode and burning through cash, you made under $50,000 in profit last year, or you expect a big drop in income next year.
S-Corp status works best when your income is stable and predictable. If your Denver business has wild swings in profitability, the administrative burden might not be worth the tax savings.
Here's our recommendation: stay as an LLC until you're consistently profitable at $60,000+ per year. At that point, book a consultation with a Denver CPA who specializes in small business taxation. Get actual numbers based on your specific income, industry, and situation.
The $60,000 to $80,000 threshold is a guideline, not a rule. Your personal threshold might be $50,000 or $90,000 depending on your circumstances. But it gives you a starting point for the conversation.
At Succentrix, we help Denver business owners analyze their specific situation with real numbers. We look at your current tax burden, estimate your reasonable salary, calculate potential self-employment tax savings, factor in QBI deduction impacts, and account for additional S-Corp costs. Then we tell you exactly what you'd save.
Most of our Denver clients who convert to S-Corp status save $5,000 to $15,000 per year in taxes. That's money you get to keep and reinvest in your business or your life. If you're ready to see if S-Corp conversion makes sense for your business, reach out to our team for a tax reduction analysis.
