If you're a successful contractor in Monmouth County pulling in over $100,000 in annual profit, you're likely overpaying in taxes by thousands of dollars every year. The culprit? Operating as a sole proprietorship or LLC taxed as a disregarded entity instead of leveraging the powerful tax benefits of S-corporation status.
The difference between these business structures isn't just paperwork—it's the difference between writing a $30,000 check to the IRS or keeping $15,000+ of your hard-earned profit. Let's break down exactly why so many New Jersey contractors are making the switch and how this single strategic decision dramatically reduces their annual tax burden.
Here's what most general contractors, HVAC business owners, and roofing contractors don't realize: when you operate as a sole proprietor or single-member LLC, you're paying 15.3% self-employment tax on every dollar of profit.
That 15.3% covers Social Security (12.4%) and Medicare (2.9%) taxes. Unlike employees who split these taxes with their employer, you're paying both halves yourself. On $150,000 of net profit, that's $22,950 in self-employment tax alone—before federal and state income taxes even enter the picture.
Let's look at a real-world example from a Brick roofing contractor we work with:
Operating as LLC (taxed as sole proprietorship):
Operating as S-Corporation:
Annual Tax Savings: $13,770
That's $13,770 back in your pocket every single year—money you can reinvest in your business, use to upgrade equipment, hire additional crew members, or build wealth for your family's future.
The S-corporation isn't a separate business entity type—it's a tax election made with the IRS that changes how your LLC or corporation is taxed. Here's the strategic advantage: instead of all your profit being subject to self-employment tax, you split your income into two categories:
1. Reasonable Salary You must pay yourself a reasonable salary for the work you perform. For construction contractors, this typically ranges from $70,000 to $120,000 depending on your role, experience, and regional market. This salary is subject to payroll taxes (the equivalent of self-employment tax), but that's where the taxable wages stop.
2. Distributions Any remaining profit can be distributed to you as an owner distribution, which bypasses self-employment tax entirely. This is where your tax savings accumulate.
The IRS requires the salary to be "reasonable" based on what similar positions earn in your industry and location. This is where working with a CPA who specializes in contractor businesses becomes critical—setting the salary too low triggers audit risk, while setting it too high eliminates your tax savings.
While the self-employment tax savings grab headlines, S-corporations provide several additional advantages for New Jersey contractors:
Health Insurance Deductions S-corp shareholders can deduct health insurance premiums as a business expense, reducing both business income and personal taxes. For contractors with families, this typically saves an additional $2,000-$4,000 annually.
Retirement Plan Contributions S-corps can establish Solo 401(k)s, SEP IRAs, or SIMPLE IRA plans, allowing you to defer up to $69,000 (2024 limits) into retirement accounts while reducing your current tax burden. This creates tax-advantaged wealth building while lowering your immediate tax bill.
Home Office Deductions If you run your contracting business from a home office, S-corps can legitimately pay you rent for office space, creating a deduction for the business and additional documentation for office expense claims.
Enhanced Credibility S-corps signal a more established, professional operation to suppliers, lenders, and high-end clients. This matters when bidding on larger commercial projects or securing business credit lines.
Asset Protection Combined with proper bookkeeping practices and maintaining corporate formalities, S-corps provide liability protection separating business debts from personal assets.
Before you file Form 2553 and elect S-corp status, understand that this structure comes with additional compliance requirements and costs:
Payroll Processing Requirements You must run formal payroll for your salary, filing quarterly 941 forms and annual W-2s. This requires payroll services either in-house or outsourced to a professional. Budget $800-$1,500 annually for payroll processing.
Accounting Complexity S-corps require more sophisticated bookkeeping than sole proprietorships. You'll need to properly categorize owner distributions, track shareholder basis, and maintain clear separation between personal and business finances. Expect to invest $1,500-$3,000 annually in proper accounting services.
State Fees and Filings New Jersey charges annual report fees and requires separate S-corp tax filings. Factor in approximately $500 annually for compliance costs.
The Bottom Line: Even with these additional costs (typically $2,800-$5,000 annually), contractors earning over $80,000-$100,000 in net profit still realize substantial net savings. The break-even point varies by individual situation, which is why working with a CPA who understands contractor-specific challenges is essential.
S-corporation status isn't the right solution for every contractor. Here's when it typically makes strategic sense:
You Should Consider S-Corp Status If:
S-Corp May Not Be Worth It If:
For electrician contractors, landscaping businesses, and siding contractors in the growth phase, the decision requires careful analysis of your specific financial situation and long-term business goals.
Converting from sole proprietorship or LLC to S-corporation status involves several critical steps and specific IRS deadlines:
Step 1: Establish or Convert to an LLC or Corporation (Weeks 1-2)If you're currently operating as a sole proprietor, you'll first need to form an LLC with the New Jersey Division of Revenue. If you already have an LLC, you're ready for step two.
Step 2: File Form 2553 with the IRS (Week 3)This is your S-corporation election form. Critical deadline: file within 75 days of your fiscal year start (typically January 1) or within 75 days of forming your entity. Miss this deadline, and you'll wait until the following tax year for S-corp status to take effect.
Step 3: Establish Payroll Systems (Weeks 4-6)Set up payroll processing to pay your reasonable salary. This includes obtaining an EIN (if you don't already have one), registering with New Jersey for state payroll taxes, and establishing a system for quarterly payroll tax deposits.
Step 4: Update Bookkeeping Practices (Ongoing)Implement systems to properly track owner distributions, maintain separate accounts for business and personal expenses, and document all transactions. Professional bookkeeping services ensure compliance and maximize your tax benefits.
Step 5: File S-Corp Tax Returns (Following April)Your first Form 1120S (S-corporation tax return) will be due by March 15 of the year following your S-corp election. This separate return reports business income, deductions, and distributions, then passes through to your personal Schedule K-1.
The IRS scrutinizes S-corporations carefully because of the substantial tax savings they provide. Avoid these red flags that frequently trigger audits:
Unreasonably Low Salaries Paying yourself $30,000 while taking $150,000 in distributions will catch the IRS's attention immediately. The "reasonable compensation" requirement isn't a suggestion—it's a legal mandate. Violate it, and the IRS can reclassify your distributions as wages, assessing back taxes, penalties, and interest.
Commingling Personal and Business Funds S-corp status requires maintaining separate accounts and documenting all transactions clearly. Using the business account for personal expenses or vice versa undermines your corporate structure and invites IRS scrutiny.
Failing to Run Formal Payroll Some contractors try to avoid payroll processing by simply taking distributions. This violates S-corp requirements and will cost you far more in penalties than proper payroll services.
Inadequate Bookkeeping Sloppy financial records, missing documentation, and irregular financial statements create audit risks. The IRS expects S-corporations to maintain professional-level accounting.
Missed Quarterly Tax Deposits S-corps must make quarterly estimated tax payments based on income projections. Missing these deadlines triggers penalties and interest charges.
Working with a CPA who specializes in proactive tax planning helps you navigate these requirements confidently while maximizing your legitimate tax savings.
Once you've established S-corp status, several advanced strategies can amplify your tax savings:
Strategic Salary Timing Adjust your salary strategically based on projected business income throughout the year. In slower winter months, you might lower your salary; during busy summer construction season, increase it to match revenue. This requires careful planning with quarterly reviews.
Health Savings Accounts (HSAs) S-corp shareholders with high-deductible health plans can contribute to HSAs, creating triple tax advantages: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
Vehicle Depreciation Contractors with business vehicles can maximize depreciation deductions through Section 179 or bonus depreciation, potentially deducting the full purchase price in year one for qualifying trucks and equipment.
Cost Segregation Studies For contractors who own their business property or shop, cost segregation studies accelerate depreciation deductions, creating substantial tax savings in early years.
Retirement Plan Combinations Layer multiple retirement vehicles—Solo 401(k) contributions, defined benefit plans for high earners, and spousal IRAs—to defer maximum income while building long-term wealth.
These advanced strategies require coordination with year-round tax planning services rather than once-yearly tax preparation. The difference between reactive tax filing and proactive tax strategy often equals $10,000-$30,000 in additional annual savings.
Most contractors don't realize that S-corporation elections have strict timing requirements that can cost you a full year of tax savings if missed.
The 75-Day Rule To have S-corp status take effect for the current tax year, you must file Form 2553 within 75 days of either:
Miss this deadline, and your election won't take effect until the following tax year. That could mean an extra $15,000-$25,000 in unnecessary self-employment taxes.
The Late Election Option If you've missed the deadline, the IRS occasionally grants late S-corp elections if you can demonstrate "reasonable cause." This requires filing a detailed request with your Form 2553, but approval isn't guaranteed.
Planning Ahead for Next Year If you're reading this past the deadline, don't wait until next year rolls around to prepare. Use this time to:
When January arrives, you'll be positioned to file your S-corp election immediately and capture a full year of tax savings.
The S-corporation strategy works differently when multiple owners are involved. If you have a business partner or multiple members in your LLC, S-corp election affects all members:
Equal Treatment Requirements All shareholders must be paid reasonable salaries for their roles, and distributions must be proportional to ownership percentages. You can't give one partner a salary while the other takes only distributions.
Multiple Reasonable Salaries If you and a partner both work actively in the business, you'll each need reasonable salaries. This increases payroll costs but still typically results in substantial net savings for profitable partnerships.
Partner Compensation Issues S-corps handle partner compensation differently than partnerships. Guaranteed payments (common in partnerships) aren't allowed in S-corps—partners must receive W-2 wages instead.
For contractors operating as partnerships, the analysis becomes more complex. Professional accounting services can model both scenarios and determine whether S-corp election makes financial sense for your specific partnership structure.
Different contracting specialties face unique factors when considering S-corp conversion:
Roofing Contractors Seasonal income fluctuations mean roofing businesses need careful salary planning. Set a moderate base salary year-round, then adjust quarterly based on actual revenue to maintain IRS reasonableness standards.
HVAC Contractors HVAC businesses often carry high equipment costs eligible for immediate expense deductions under Section 179. Combining S-corp status with strategic equipment purchases creates compound tax savings.
Plumbing Contractors Plumbing businesses typically maintain steady year-round revenue, making S-corp salary planning straightforward. Focus on maximizing vehicle deductions and home office allocations for additional savings.
Electricians Electrical contractors who bid commercial projects often face payment delays. S-corp status allows flexibility to adjust distributions based on actual cash collected rather than accounts receivable.
General Contractors General contractors managing multiple subcontractors need robust bookkeeping to properly track job costs and maintain S-corp compliance alongside contractor payments.
At Shore Financial Planning, we don't just file your S-corp election and send you on your way. Our comprehensive approach ensures you maximize every dollar of available tax savings while maintaining full IRS compliance:
Initial Tax Analysis We analyze your last two years of tax returns, financial statements, and business structure to calculate your exact potential savings from S-corp conversion. This analysis shows precisely whether conversion makes financial sense for your specific situation.
S-Corp Election Filing We handle all paperwork for your S-corporation election, ensuring you meet IRS deadlines and complete every required form correctly. We coordinate with New Jersey state agencies for state-level compliance.
Reasonable Salary Determination Using industry compensation data specific to your contracting specialty and the Monmouth County market, we establish defensible reasonable salary amounts that maximize your tax savings while meeting IRS standards.
Payroll System Implementation We set up your payroll processing systems, handle quarterly filings, and ensure you never miss a payroll tax deadline. Your salary gets processed smoothly every pay period with zero effort on your part.
Monthly Bookkeeping Services Our team provides pristine financial records every month, properly categorizing transactions, tracking distributions, and maintaining the documentation necessary for S-corp compliance.
Quarterly Tax Planning Reviews We meet quarterly to review your year-to-date numbers, adjust estimated tax payments, identify additional tax reduction opportunities, and ensure you're on track to minimize your annual tax bill.
Year-End Tax Strategy Before December 31, we analyze your financial position and recommend strategic moves—equipment purchases, retirement contributions, expense accelerations—that reduce your current-year taxes while positioning you for success in the coming year.
Comprehensive Tax Preparation When tax season arrives, your S-corp returns (1120S) and personal returns (1040) are prepared seamlessly because we've maintained your records all year. No surprises, no scrambling for documents, no stress.
If you're a profitable contractor in Monmouth County currently operating as a sole proprietor or LLC, you're likely overpaying in taxes by $10,000-$25,000 annually. That money belongs in your pocket, not the IRS's.
Shore Financial Planning specializes in helping New Jersey contractors implement tax reduction strategies that deliver real, measurable savings. We don't just prepare your taxes once a year—we partner with you year-round to minimize your tax burden, maintain pristine financial records, and help you build wealth for your family's future.
Our clients in Brick, Toms River, Freehold, and throughout the Jersey Shore consistently save $15,000-$30,000 annually through strategic S-corp implementation combined with proactive tax planning.
Ready to stop overpaying? Contact Shore Financial Planning today for a complimentary tax analysis. We'll review your situation, calculate your potential S-corp savings, and show you exactly how much money you could keep in your pocket starting this tax year.
Don't give the IRS another $15,000 you could be investing in your business growth, your family's future, or your retirement. Make the switch to S-corporation status and start keeping more of what you earn.
Schedule your free tax analysis now →