For many business owners, electing S-corporation status was once a no-brainer. It offered payroll tax savings, pass-through taxation, and a relatively straightforward compliance structure. But tax laws evolve, businesses grow, and what worked five (or even two) years ago may no longer be the optimal fit.

As we head into 2026—with several TCJA provisions set to sunset and ongoing scrutiny around reasonable compensation—it’s the perfect time for an entity checkup.

So let’s ask the question every business owner should be asking: Does S-corp status still make sense for you in 2026?

Why This Question Matters More Than Ever

Entity choice isn’t just a tax election—it’s a strategic decision that impacts:

• Total tax liability
• Cash flow and distributions
• Exit planning and valuation
• Audit exposure and compliance risk

Too often, we see business owners “set it and forget it” with their entity structure. That can be costly.

A Quick Refresher: Why Business Owners Chose S-Corps in the First Place

The traditional S-corp benefits include:

• Pass-through taxation (no entity-level federal income tax)
• Payroll tax savings, since only wages—not distributions—are subject to Social Security and Medicare taxes
• Credibility and structure that can feel more “corporate” than a sole proprietorship or partnership

For profitable owner-operated businesses, these benefits are still real—but they’re no longer universal.

Key Factors to Reevaluate for 2026

1. Reasonable Compensation Scrutiny Is Not Going Away

The IRS continues to focus heavily on whether S-corp owners are paying themselves a reasonable salary before taking distributions.

Red flags include:

• Minimal wages with large distributions
• Compensation inconsistent with industry norms
• Owners performing most (or all) of the revenue-generating work

As wages rise and payroll tax savings narrow, the S-corp advantage may be less compelling—especially for service-based businesses.

Bottom line: If your “tax savings” rely on pushing compensation aggressively low, the risk may outweigh the reward.

2. Your Profitability Has Changed (Often Significantly)

S-corps tend to work best in a specific profit band—often cited loosely as $75,000 to $400,000 of owner-level income, depending on circumstances.

Consider:

• If profits are lower, compliance costs may outweigh benefits
• If profits are much higher, alternative structures (including C-corps or hybrid strategies) may provide better long-term planning flexibility

Growth is good—but it often requires a different tax strategy than the one that worked when you were smaller.

3. State and Local Taxes Are Playing a Bigger Role

State-level considerations matter more than ever, including:

• SALT deduction limitations
• Pass-through entity (PTE) tax elections
• Franchise taxes and minimum fees

In some states, S-corp status creates added complexity without meaningful savings. In others, PTE tax elections may tilt the scales back in favor of pass-through treatment—but only if implemented correctly.

4. Your Exit Strategy Is Becoming Clearer

If you’re thinking about:

• Selling the business
• Bringing in outside investors
• Transitioning ownership to family or key employees

…your entity choice can materially impact after-tax proceeds and deal structure.

For example:

• Asset sales vs. stock sales
• Buyer preferences
• Basis step-up opportunities

An S-corp may be fine for operations—but suboptimal for an exit.

When an S-Corp Still Makes Sense

S-corp status may still be a strong fit if:

• You have consistent profitability
• Reasonable compensation is defensible
• Owners actively work in the business
• Exit is not imminent
• Compliance costs are well-managed

The key is intentionality, not inertia.

When It May Be Time to Rethink

It’s worth revisiting your structure if:

• Payroll tax savings have shrunk
• Compliance feels burdensome
• Growth or succession plans have changed
• Your CPA hasn’t modeled alternatives recently

Entity planning should be proactive—not reactive.

The Takeaway: Don’t Default—Decide

There’s no universally “best” entity type in 2026. The right answer depends on your numbers, your goals, and your risk tolerance.

A periodic entity checkup—especially heading into a year of potential tax law changes—can uncover opportunities to:

• Reduce taxes
• Improve flexibility
• Align your structure with where the business is headed, not where it’s been

If you haven’t revisited your entity choice in the last two or three years, now is the time. If you have questions, leave a comment below or feel free to reach out directly. I'm happy to help!