She Was Paying $18,000 a Year in Taxes She Didn’t Have To. One Election Changed That.

Meet the Client

Nicole had been running her licensed child care center as a single-member LLC for six years. Her program was full, her reputation was strong, and her income had grown steadily to over $200,000 in annual net profit. By every measure, she had built a successful business.

But every April, she wrote a tax check that made her stomach turn. She knew she was paying a lot — she just assumed that was the price of doing well. What she didn’t know was that her business structure was costing her an extra $18,000 every single year, and a simple IRS election could stop it.

The Challenge

As a single-member LLC, Nicole paid self-employment (SE) tax on her entire net profit — 15.3% on the first $168,600 and 2.9% on everything above that. This tax covers both the employer and employee sides of Social Security and Medicare, and for a sole proprietor or LLC owner, there is no way around it. Every dollar of profit flows directly to her personal return, and the IRS taxes all of it as self-employment income.

On $200,000 in net income, Nicole’s SE tax bill alone was over $28,000 per year — on top of her regular federal and state income taxes. She was, in effect, paying both sides of payroll tax on every dollar she earned, with no structure in place to change that.

“I had a great accountant who filed my taxes accurately every year. But no one had ever sat down with me and said, ‘Here’s what you could be doing differently.’ I just assumed the taxes were what they were.”

Our Approach

When Nicole came to Honest Buck, the first thing we identified was that her LLC income had long since crossed the threshold where an S-Corporation tax election would generate meaningful savings. An S-Corp election doesn’t change the legal structure of her LLC — it simply changes how the IRS taxes it. Under S-Corp treatment, Nicole’s income is split into two categories: a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax at all).

We worked with Nicole to determine a defensible reasonable salary for her role as the owner-operator of a child care center — benchmarking against industry compensation data for her level of responsibility, hours worked, and geographic market. We landed on an $80,000 annual salary, leaving $120,000 to flow through as distributions.

We filed IRS Form 2553 to elect S-Corp status, set Nicole up on payroll through Gusto, and transitioned her tax filings from Schedule C to Form 1120-S. The entire process took less than 30 days from our first conversation to her first payroll run.

Before and After: The Tax Impact

The Results

In Nicole’s first full year as an S-Corp, her payroll tax liability dropped from $28,060 to $12,240 — a gross savings of $15,820. After accounting for the annual cost of payroll administration and S-Corp tax preparation ($2,400), her net savings in year one were $13,420. That savings repeats automatically every year she remains in S-Corp status — no additional work required.

Nicole also became eligible to contribute to a Solo 401(k) based on her W-2 salary, opening a retirement savings avenue she hadn’t previously been able to maximize. The S-Corp election didn’t just reduce her current tax bill — it improved the entire financial architecture of her business going forward.

“I wish I had done this years ago. Honest Buck walked me through exactly what was happening, showed me the numbers side by side, and took care of everything. I got my first paycheck as an S-Corp employee and realized I had been overpaying for six years.”