If you own a construction business, chances are someone has told you: “You should be an S-Corp—it’ll save you on taxes!” But is it really the best move for every contractor? The answer isn’t one-size-fits-all. Let’s break it down so you can understand the pros and cons before making a move.

The Benefits of an S-Corp for Contractors

1. Potential Tax Savings
   With an S-Corp, you can split your income into two parts:

   • A “reasonable salary” (subject to payroll taxes).

   • The rest as shareholder distributions (not subject to self-employment tax).
     This often means contractors keep more of their hard-earned money.

2. Professional Image
   Operating as an S-Corp can give your business more credibility with clients, banks, and even when bidding for bigger projects.

3. Limited Liability Protection
   Just like an LLC, an S-Corp protects your personal assets from most business liabilities. For contractors dealing with big jobs, employees, and subcontractors, this peace of mind is valuable.

The Challenges of an S-Corp

1. Payroll Requirements
   As an S-Corp owner, you’re required to run payroll for yourself—even if you’re the only employee. This means added bookkeeping, tax filings, and payroll costs.

2. More Paperwork
   Compared to a sole proprietorship or LLC, S-Corps require more administrative work: officer compensation reports, corporate minutes, and stricter IRS compliance.

3. “Reasonable Salary” Scrutiny
   The IRS expects you to pay yourself a fair market wage before taking distributions. If you set it too low, you could be flagged for an audit.

When an S-Corp Might Make Sense

• Your net profits are consistently higher than $75,000–$100,000 per year.

• You’re already running payroll for employees, so adding yourself won’t be a big jump.

• You want to save on self-employment taxes and don’t mind extra compliance.

When an S-Corp Might Not Be the Best Fit

• Your business is just starting out with inconsistent income.

• You prefer to keep things simple with minimal reporting.

• You’re not ready to handle payroll or higher bookkeeping fees.

Final Thought

An S-Corp can be a powerful tool for established contractors, but it’s not the right fit for everyone. The key is understanding your numbers and having a trusted bookkeeper and tax professional walk you through the costs versus savings.