If your business made good money this year, someone has probably told you to “go S corp.” Sometimes that advice saves thousands of dollars a year. Sometimes it adds cost and paperwork for almost no benefit. Here’s how to tell which one you are before the new year starts.
Across the Permian Basin, a lot of business owners run as sole proprietors or single-member LLCs: oilfield service companies, trucking outfits, electricians, welders, consultants, and contractors working out of Odessa, Midland, Andrews, Monahans, and Big Spring. When a good year turns into a string of good years, the self-employment tax bill starts to sting. An S corporation election is one of the most common ways to reduce it.
What an S Corp Election Actually Changes
As a sole proprietor or single-member LLC, you pay self-employment tax of 15.3% on most of your net profit, on top of income tax. That covers Social Security and Medicare.
As an S corporation, you split your income into two parts. You pay yourself a reasonable salary through payroll, and payroll taxes apply to that salary. The rest of the profit comes to you as a distribution, which is not subject to Social Security or Medicare tax. The savings come from that second part.
The catch is the word “reasonable.” The IRS expects the salary to match the work you do, based on your duties, your experience, your time in the business, and what similar businesses pay for the same role. If the salary is too low, the IRS can treat your distributions as wages and assess the payroll taxes you skipped.
A Permian Basin Example
Say you own an oilfield services LLC in Odessa that nets $150,000 a year. You do the field work and run the business. For this example, say a reasonable salary for your role is $70,000. Your real salary has to be backed up by your duties and what similar jobs pay locally, not copied from an example. Using 2026 rates (the Social Security wage base rises to $192,300 in 2027, which doesn’t change this example):
| Sole proprietor or LLC | S corporation | |
|---|---|---|
| Income subject to Social Security and Medicare | $138,525 (92.35% of profit) | $70,000 (your salary) |
| Self-employment or payroll tax at 15.3% | $21,194 | $10,710 |
| Texas unemployment tax (new-employer rate, 2.7% of first $9,000) | $0 | $243 |
| Federal unemployment tax (0.6% of first $7,000) | $0 | $42 |
| Payroll processing (one employee, Cash Flow Pros pricing) | $0 | $1,620 |
| Total | $21,194 | $12,615 |
That’s roughly $8,500 a year in payroll-type taxes. Your real savings will be smaller. You’ll pay to prepare the S corp’s own tax return. You lose the income tax deduction for half of your self-employment tax. Your qualified business income deduction shrinks, because your salary doesn’t count toward it. And reporting lower Social Security wages can mean a smaller Social Security benefit later. That’s why we run both versions of your return before you decide.
When It Usually Isn’t Worth It
Now take a business that nets $50,000 with a reasonable salary of $35,000. The self-employment tax is about $7,065 and the payroll tax would be $5,355, a difference of about $1,710. Once you add payroll processing and unemployment taxes, the S corp costs more than it saves.
An S corp election also tends to be a poor fit when:
- Your profit swings a lot from year to year, or you expect a loss
- Most of your profit would have to be paid as salary anyway, because you are the only one producing the income
- You plan to bring in investors who want different classes of ownership, or owners who aren’t eligible S corp shareholders
- You aren’t ready to run payroll every pay period and keep business and personal money fully separate
What It Costs to Run an S Corp in Texas
Texas has no personal income tax, so the election mostly changes your federal taxes. Here’s what you take on:
- Payroll. You become an employee of your own company, with withholding, quarterly payroll returns, and a W-2 every year. At Cash Flow Pros, payroll processing is $125 a month plus $10 per employee.
- A separate business tax return. The S corporation files Form 1120-S each year and sends you a Schedule K-1.
- Unemployment taxes. As a corporate officer you are an employee for Texas unemployment purposes. New Texas employers pay 2.7% on the first $9,000 of each employee’s wages in 2026 (established accounts get their own rate), plus federal unemployment tax.
- Cleaner books. Owner draws become distributions, and personal expenses can’t run through the business.
A Note on the Texas Franchise Tax
An S corporation is a taxable entity for the Texas franchise tax, but so is an LLC, including a single-member LLC. If you already have an LLC, electing S corp status doesn’t change your franchise tax situation. If you’re a true sole proprietor with no LLC, forming one does bring you into the franchise tax system. For 2026 reports, businesses with revenue at or below $2.65 million owe no franchise tax (the same threshold applies to 2027 reports), but they still file a Public Information Report or Ownership Information Report by May 15.
Why January 1 Is the Cleanest Start Date
You can make the election mid-year, but starting on January 1 keeps things simple. Your whole year is under one tax treatment, payroll starts with the first paycheck of the year, and you don’t split your books into “before” and “after.”
To start S corp treatment on January 1, 2027, an existing business files IRS Form 2553 any time during 2026 or by March 15, 2027. (A brand-new company formed in 2027 files within 2 months and 15 days of starting.) Every shareholder has to sign the consent. An LLC can file Form 2553 directly, without a separate Form 8832. If you miss the deadline, the IRS offers late-election relief in many cases, but it’s far easier to file on time.
To elect, the business must have no more than 100 shareholders, only one class of stock, and only eligible shareholders, which generally means U.S. citizens and residents, certain trusts, and estates. If you later revoke the election, you generally can’t elect again for five years without IRS consent.
Your Checklist Before December 31
- Get your books current through the third quarter so you know your real 2026 profit.
- Estimate your 2027 profit, not just this year’s.
- Decide on a reasonable salary you can document, based on your role and local pay for similar work.
- Compare the self-employment tax you pay now with payroll taxes plus the added costs.
- If the numbers work, file Form 2553 and set up payroll so your first 2027 paycheck runs through it.
- Open or confirm a separate business bank account and stop paying personal expenses from it.
Frequently Asked Questions
Does Texas recognize S corporations?
Texas has no personal income tax, so there’s no state income tax election to make. For the franchise tax, an S corporation is treated as a taxable entity, the same as an LLC.
Can my LLC be taxed as an S corp?
Yes. An eligible LLC files Form 2553 and is treated as an S corporation for federal tax starting on the effective date. It stays an LLC under Texas law.
How much profit do I need before an S corp makes sense?
There’s no single number. It depends on your profit, the reasonable salary for your role, and your added costs. In the examples above, $150,000 of profit cut payroll-type taxes by about $8,500 a year, and $50,000 of profit didn’t pay for itself.
What’s the deadline for a January 1, 2027 election?
March 15, 2027. If your business already exists, you can also file any time during 2026.
Can I pay myself a very small salary to save more?
No. The IRS expects a reasonable salary for the work you do and can reclassify distributions as wages if your salary is too low.
Run the Numbers With Cash Flow Pros
Cash Flow Pros has helped business owners in Odessa, Midland, and across the Permian Basin keep more of what they earn for more than 40 years. We’ll compare your current setup with an S corp using your real numbers, help you set a salary you can defend, file the election, and set up payroll so January 1 goes smoothly.
Call (432) 249-3597 or contact us to schedule a tax planning meeting.
This article reflects federal and Texas rules as of October 2026 and uses 2026 rates in its examples. It is general information, not tax advice for your situation.
Sources
- IRS: Instructions for Form 2553
- IRS: S corporation compensation and medical insurance issues
- Social Security Administration: Contribution and benefit base
- Journal of Accountancy: Social Security wage base and COLA announced for 2026
- Texas Comptroller: Franchise tax overview (Pub. 98-806)
- Texas Comptroller: 2026 franchise tax forms
- Texas Workforce Commission: Unemployment tax rates
