In law school, we are trained to spot issues, write briefs, and negotiate deals.

We are almost never taught how to run a business, let alone how to structure a law practice so it does not overpay the IRS every April.

If you are operating as a sole proprietor or a standard single-member LLC, you may be leaving thousands of dollars on the table every year. For solo and small firms, electing to be taxed as an S-Corporation is one of the most effective tax planning moves available.

Here is what it actually is, how it saves money, and when it is worth making the switch.

The short version

• An S-Corp is a tax election, not a business entity. You still form a PC or PLLC with your state.

• The election lets you split your income into a W-2 salary and shareholder distributions. Only the salary gets hit with the 15.3% payroll tax.

• The savings usually start outweighing the extra compliance cost somewhere around $75,000 to $100,000 in net profit.

• Your state may not play along. Check state and local rules before you file anything.

1. First, check what your state lets you be

Most small businesses can form a standard LLC and move on. Attorneys cannot always do that.

State bar rules and state law limit which structures a law firm can use, and the rules vary by jurisdiction:

• California does not allow a law firm to operate as a PLLC.

• The District of Columbia does allow it.

• Both allow law firms to operate as Professional Corporations.

So before anything else, confirm what your licensing jurisdiction actually permits. If you are barred in more than one state, check all of them.

2. The tax blindspot: the C-Corp default

Here is where a lot of firms get caught.

If you form a Professional Corporation at the state level and do nothing else, the IRS defaults your tax status to a standard C-Corporation.

That means two layers of tax:

Under IRC §11, C-Corporations pay a flat 21% federal corporate income tax on every dollar of profit, before you pay yourself anything.

Then, if you distribute what is left to yourself as a dividend, it gets taxed again on your personal return at qualified dividend rates of up to 23.8% federally, plus state tax.

Stack those layers and a single dollar of profit can face an effective rate above 50%.

Some attorneys get around this by "zeroing out" the PC's income, paying themselves a 100% W-2 salary so there is no corporate profit left to tax. It works, but you pay payroll taxes on every dollar you earn and leave nothing in the business to grow with.

There is a better option.

3. What the S-Corp election actually does

An S-Corp is not something you form with the Secretary of State. It is a tax election you make by filing Form 2553 with the IRS. A PC or a PLLC can both elect to be taxed under Subchapter S.

Once you make the election, your firm becomes a pass-through entity. The corporation pays no federal income tax at the entity level. Profits and losses flow to your personal return on Schedule K-1.

The value is in how you are allowed to split your income.

W-2 salary. You pay yourself a reasonable salary as an employee of your own firm. This is subject to ordinary income tax and FICA payroll taxes: 15.3% combining Social Security and Medicare up to the Social Security wage base ($184,500 in 2026), then 2.9% Medicare with no cap above that.

Shareholder distributions. Whatever profit is left after your salary and business expenses gets distributed to you as a shareholder. Those distributions are exempt from FICA and self-employment tax.

Compare that to a sole proprietor or default single-member LLC, where 100% of net business profit is subject to the 15.3% self-employment tax under IRC §1402.

That gap is the whole strategy.

4. The math, side by side

Take a solo attorney with $150,000 in net business profit:

By making the election and taking a defensible $70,000 salary, this attorney keeps an extra $12,240 a year.

That is over $1,000 a month staying in your pocket instead of going to the IRS. Over a decade, it is more than $120,000.

A note on "reasonable": the salary figure is not arbitrary. The IRS expects it to reflect what you would pay someone else to do your job, and a salary set too low is one of the fastest ways to draw scrutiny.

5. When to pull the trigger

S-Corp status is not free. It brings real administrative overhead:

• Running a formal W-2 payroll and filing quarterly payroll reports (Form 941)

• Filing a separate corporate return (Form 1120-S), due March 15, a full month before your personal return

• Keeping corporate books and meeting ongoing corporate formalities

Tax prep, bookkeeping, and payroll services typically run $1,500 to $2,500 a year, so the election only makes sense once your profit clears that cost by a comfortable margin.

The rule of thumb:

• Under $50,000 in net profit: staying a sole proprietor or single-member LLC is usually the practical call.

• $75,000 to $100,000 and climbing: the election generally starts paying for itself.

The word doing the work there is consistently. One strong year is not a reason to restructure.

6. State and local landmines

Before you file, look past the federal picture.

Not every state recognizes S-Corp status. Some jurisdictions ignore the election at the state or local level and tax the entity anyway.

Watch for entity-level taxes. Unincorporated business taxes and franchise taxes apply differently depending on your structure, and they can quietly eat into the federal savings.

The PTET workaround. In high-tax states like California and New York, S-Corps can make a Pass-Through Entity Tax election. The business pays state income tax at the entity level and deducts it federally, which gets around the $40,400 federal SALT cap.

Federal, state, and local. Run all three before you decide.

7. Your transition checklist

If your firm is consistently clearing $75,000 in net profit and you are ready to move:

1. Form the professional entity. File with your Secretary of State as a PC or PLLC, after confirming your bar rules allow it.

2. Get a new EIN. Secure an Employer Identification Number from the IRS for the new entity.

3. Open separate bank accounts. New business operating account and a new Client Trust (IOLTA) account. Never mix personal and operating funds, it is the fastest way to lose your liability shield.

4. File Form 2553. The election is due by March 15 of the tax year, or within 75 days of forming a new entity. If you have missed the deadline in past years, you may qualify for late election relief under Rev. Proc. 2013-30 going back up to 3 years and 75 days.

5. Set up payroll. Get a payroll provider handling your W-2 withholdings and salary runs before your first paycheck, not after.