The Other Question
MONEY MEETS TAX · EPISODE 12
Anaheim · Spring 2025
Money & Tax in this episode
Growing consulting income · S corporation election · Payroll and reasonable compensation
The number was $24,860.
Evan checked it twice.
Not because anything was wrong.
That was the problem.
By spring, he had collected almost as much from consulting as he had during all of last year.
Most of the year was still ahead.
He looked at the client list.
Kevin’s company was still there.
So was the distribution company.
Two newer clients had come through referrals.
One project was almost finished.
Another proposal was waiting for an answer.
Evan opened a new browser tab.
He typed:
when should LLC elect S corp
The results were confident.
One said $40,000.
Another said $50,000.
A third said $60,000.
Evan opened all three.
By the time Daisy came downstairs, there were nine tabs.
She stopped behind him.
“What happened?”
“Nothing.”
“You have nine tabs.”
“I’m comparing.”
Daisy smiled.
“That usually means you found something.”
Evan pointed at the screen.
“S corporation.”
Daisy looked at him.
“You already have an LLC.”
“Yes.”
“So this is a different company?”
“No.”
She waited.
“The LLC can be taxed as an S corporation.”
“So it’s still an LLC.”
“Yes.”
“But taxed differently.”
“For tax purposes.”
Daisy looked back at the screen.
“That seems unnecessarily complicated.”
“It’s actually pretty common.”
“I believe you.”
She pulled out the chair beside him.
“What would it change?”
“That’s what I’m trying to figure out.”
“How much are you making now?”
“More than last year.”
“That sounds familiar.”
“I have a projection.”
Daisy smiled.
“I assumed you did.”
Evan turned the laptop slightly toward her.
She looked at the spreadsheet for a moment.
Then at the nine browser tabs.
“Maybe Arthur gets a vote before tab ten.”
Evan looked at the screen.
“That seems reasonable.”
He closed two tabs.
Then emailed Arthur.
The reply came the next morning.
How much net profit are you expecting this year?
Evan typed:
Around $60K if current work holds.
Three minutes later:
Still W-2?
Yes.
Then:
Let’s talk.
Arthur had forty minutes Thursday afternoon.
This time Evan did not join from his car.
He blocked his work calendar, shut the door to a small conference room, and opened the call.
Arthur appeared on screen.
Same bookshelf.
Different shirt.
The printer was still there.
Arthur looked at his notes.
“You’re projecting about sixty thousand dollars of consulting profit?”
“Approximately. Maybe a little less.”
“And you’re still doing all the consulting work yourself?”
“Yes.”
“No employees?”
“No.”
“And you still have the full-time W-2 job.”
“Yes.”
Arthur nodded.
“Okay. At that level, an S election is worth analyzing. I wouldn’t make it yet based on what I know today.”
Evan picked up his pen.
“So sixty thousand isn’t enough?”
“There isn’t a sixty-thousand-dollar rule.”
Evan glanced at the browser window he had left open behind the call.
“I found several.”
“I’m sure.”
“Some of them were very specific.”
Arthur smiled slightly.
“A specific number can still be the wrong answer.”
Evan closed the browser.
“So what determines it?”
“Whether the tax savings are large enough to justify what you’re adding.”
“Payroll.”
“Payroll. A separate S corporation tax return. More bookkeeping. California tax and compliance.”
“And potentially lower self-employment tax.”
“Potentially.”
Evan started writing.
Arthur continued.
“But don’t calculate the savings as though all sixty thousand stays outside payroll.”
Evan stopped.
“Because I have to pay myself a salary.”
“Right. If the business elects S corporation status and you perform the services, you generally need to pay yourself reasonable compensation as a shareholder-employee.”
“I take money out of the business now.”
“That’s different. What you take out now is not W-2 wages from an S corporation.”
“Okay.”
Arthur looked at his notes.
“The important part is that we don’t choose the wage backward from the tax savings you want.”
Evan looked at the $60,000 he had written at the top of the page.
“So how do we choose it?”
“Based on the work you actually perform and what reasonable compensation for that work looks like.”
“Can we estimate it?”
“Yes. But I need better facts about the business before I’d give you a number.”
Evan put the pen down.
“That makes sense.”
“And your existing W-2 wages matter too.”
“What about them?”
“They affect the employment-tax comparison. You already have wages from another employer, so I want to look at the whole picture rather than give you a simple percentage.”
Evan stared at the page.
“I was hoping for a simple percentage.”
“I know.”
Arthur glanced at his notes.
“For you, I’d compare projected profit, reasonable compensation, your existing W-2 wages, payroll costs, the separate return, and California.”
Evan crossed out something on the page.
Arthur noticed.
“What did you have there?”
“Estimated savings.”
“Good thing to calculate.”
Evan looked up.
“Just not yet?”
“Not until the assumptions underneath it are worth using.”
Evan leaned back.
“So what would you do?”
“I’d wait.”
Arthur answered before Evan could write anything else.
“Not because sixty thousand is automatically too low. I’d wait because your consulting is still changing quickly, you’re working full-time, and we’ll have better information later this year.”
Evan looked at the page.
“So this could still make sense.”
“Absolutely.”
“Just not enough information yet.”
“That’s how I see it.”
Arthur continued.
“If the business keeps growing, we revisit it for 2026.”
“When?”
“October.”
“Why October?”
“By then we can look at actual year-to-date profit, the work in your pipeline, what 2026 is starting to look like, and a reasonable compensation range. Then we can compare the tax savings against the extra cost and work.”
“And decide.”
“And decide.”
Evan wrote:
October
Arthur watched him.
“You can circle it if that helps.”
Evan did.
Arthur smiled.
Before ending the call, Evan looked back at his notes.
“Last year I was asking whether I needed an LLC.”
“Yes.”
“And now I’m asking whether it should be an S corporation.”
Arthur shook his head slightly.
“Your LLC would still be the LLC.”
“Right.”
“You’re really asking whether changing its tax treatment is worth changing how you run the business.”
Evan looked at the page.
“That’s a longer question.”
“It’s also the useful one.”
That evening, Daisy was at the dining table with a finish schedule open on her laptop.
Evan put his bag down.
“I talked to Arthur.”
Daisy looked up.
“And?”
“He doesn’t know how much the S corporation would save yet.”
“That sounds less exciting than nine tabs.”
“There’s no magic number.”
Daisy smiled.
“How are you handling that?”
“There are still numbers.”
“Good.”
Evan sat across from her.
“He thinks I should wait.”
“Until when?”
“October.”
Daisy looked at him.
“What changes in October?”
“More facts.”
She nodded.
“That actually sounds reasonable.”
“It’s tax planning.”
“I know.”
Daisy went back to her screen.
After a minute, she looked over again.
“So nothing changes for now?”
“Right.”
“Same LLC?”
“Yes.”
“Same basic structure?”
“Yes.”
She glanced at his browser.
“Fewer tabs?”
Evan looked.
There were three left.
“I closed six.”
Daisy smiled.
“Growth.”
Evan smiled too.
A new email was waiting from the client whose proposal had been sitting out.
We’d like to move forward.
Can you start next month?
Evan read it.
The project was larger than the one he had finished in March.
He opened the proposal.
Then his calendar.
June was already crowded.
He moved two things.
Looked again.
Then typed:
Yes. I can start the second week.
He sent it.
He did not reopen the S corporation calculator.
In October, Arthur was already on the calendar.
The Tax Behind the Story
An LLC and an S corporation are not the same kind of thing. Evan’s LLC is a legal entity under state law. If it qualifies and makes a valid election, it can be treated as an S corporation for federal tax purposes while remaining an LLC under state law.
An S corporation election can change how employment taxes apply, but it does not allow an owner who performs substantial services to simply replace wages with distributions. A shareholder-employee generally must receive reasonable compensation for services performed.
There is also no universal profit level at which an S corporation automatically becomes the better answer. Profit, reasonable compensation, existing W-2 wages, payroll and compliance costs, and state taxes can all affect the comparison.
For Evan, the question is no longer whether an LLC sounds more official.
It is whether a different tax treatment is worth changing how he runs the business.
Want the tax rules behind the story?
LLC vs. S Corporation: When Does an S Election Make Sense?
A deeper look at LLC legal status, S corporation tax elections, reasonable compensation, payroll taxes, California S corporation rules, and why there is no single income threshold that makes the election automatically worthwhile.
Next Episode
The Offer
A recruiter calls Evan about a job in Irvine.
The compensation is better.
So is the distance between work and the life he and Daisy are already trying to plan.