S-Corp Tax Planning in LA

The S-corporation is the most popular tax structure for self-employed professionals earning over $80K–$100K in net income, and for good reason — it splits your earnings into salary and distributions, which reduces self-employment tax on the distribution side. But running an S-corp in California comes with its own wrinkles: the $800 minimum franchise tax, the 1.5% net income tax, and the state’s pass-through entity tax election. We help LA-based S-corp owners get the structure right and keep it running efficiently.

The $800 Franchise Tax & 1.5% Net Income Tax

Every S-corporation in California owes a minimum $800 franchise tax annually — no exceptions, no matter what the business earned. On top of that, California charges a 1.5% tax on the S-corp’s net income, with the $800 serving as a floor. So if your S-corp earns $200,000 in net income, you’re paying $3,000 to the state ($200K x 1.5%), not $800.

This is the first thing we calculate when evaluating whether an S-corp makes sense for an LA client. If your self-employment tax savings exceed the franchise tax and compliance costs (payroll, additional return filing, state fees), the S-corp wins. If you’re earning $50,000 net, the math doesn’t work. The breakeven shifts depending on your industry, but somewhere around $80K–$100K in net income is usually where the S-corp starts making sense.

Reasonable Salary

The IRS requires S-corp owner-employees to pay themselves a “reasonable salary” before taking distributions. Set the salary too low and you invite an audit. Set it too high and you’re paying more payroll tax than necessary. There’s no magic number — the IRS looks at what someone in your role, in your industry, in your geography would earn as an employee.

For LA-based professionals in entertainment, consulting, and creative services, we set salaries based on actual market data and document the reasoning. That way, if the IRS questions it, the position holds up. We’ve seen people set their salary at $24,000 on $300,000 of S-corp income. That’s asking for trouble. We’ve also seen people pay themselves $200,000 salaries on $250,000 of income, which defeats the purpose. The right answer is somewhere in between, and we help you find it.

California PTET Election

California’s Pass-Through Entity Tax (PTET) lets S-corps and partnerships elect to pay state income tax at the entity level — currently 9.3% of qualified net income. The individual owners then get a credit on their personal returns. Why bother? Because the SALT deduction cap limits individual state tax deductions to $10,000 on federal returns, but entity-level taxes are deductible as a business expense with no cap.

The PTET election is not automatic — it has to be made by the original due date of the return (March 15 for S-corps), and the estimated payments follow a specific schedule. We evaluate the PTET election for every S-corp client and make the election when the math works. For higher-income owners, the federal tax savings from deducting the state tax at the entity level more than covers the administrative effort.

Why LA S-Corp Owners Work With Us

Running an S-corp is not a set-it-and-forget-it decision. Every year you need payroll processing, quarterly estimated payments, an 1120-S return, your personal return, and the PTET election if it applies. Skip any of those and the benefits evaporate — or worse, you create a compliance problem.

We handle the whole cycle: payroll setup, quarterly payments, year-end return preparation, and ongoing review of whether the S-corp structure still makes sense as your income changes. If you’ve outgrown it, or if a different structure would save more, we’ll tell you.

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