Signed, filed, and overpaying.

When a new client comes to us, we ask for the last three years of returns. Not to grade them. Old returns are the closest thing this profession has to an X-ray: they show you what a business has been doing, and just as often, what nobody ever told the owner to do.

And there is one pattern we see more than any other. It shows up on two kinds of returns that look nothing alike, which is why almost nobody notices it is the same problem.

The first return is a Schedule C. Sole proprietor, or a single-member LLC taxed like one. The net profit line reads $180,000, and the year before that $160,000, and the year before that $140,000. A business growing steadily for years, still filing like a weekend side gig. Somewhere on that return is roughly $25,000 a year of self-employment tax, paid without complaint, because no one ever mentioned there was an alternative.

The second return is an S corporation. The owner did hear about the alternative. Somebody on the internet was very excited about it. And the return shows what happens when you take the advice without the instructions: officer compensation, zero. A year of the owner paying themselves by transferring money whenever the checking account looked healthy, then a scramble in December to run a “salary” through payroll software bought that week. Or a salary that did exist all year, but was picked because a forum said $40,000 was the number everyone uses.

The miss, from the first side

Here is what the Schedule C owner was never told. Every dollar of that net profit gets hit with self-employment tax: 15.3% on 92.35% of net earnings. The Social Security piece (12.4%) stops at $184,500 of earnings in 2026, but the Medicare piece (2.9%) never stops, and past $200,000 for a single filer ($250,000 joint) another 0.9% joins in. The tax rides the whole profit, whether the owner took the money out or left it in the business.

An S corporation splits that profit in two. The owner takes a W-2 salary, and that salary carries the usual 15.3% in combined FICA. Whatever profit remains above the salary flows through as a distribution, and distributions carry no self-employment or FICA tax at all.

Put numbers on it. A business nets $200,000. As a sole proprietorship, self-employment tax runs about $28,200. As an S corporation paying the owner a defensible $100,000 salary, the combined FICA on that salary is about $15,300. That is roughly $12,900 a year, before two honest subtractions: running payroll costs real money (usually somewhere between $500 and $1,500 a year all-in), and the salary shaves the 20% qualified business income deduction, because wages you pay yourself do not count as QBI. The net saving is smaller than the headline, and it is still, for most businesses at this size, five figures. Every year. Compounding against you for every year nobody brought it up.

Which raises the obvious question the owner eventually asks us, quietly: why didn’t my accountant say something?

The miss, from the other side

Now the second return, because it is the more painful one. This owner did everything the video said, except the parts the video skipped.

An S corporation owner who works in the business is required to take reasonable compensation as a W-2 salary before taking distributions. Not a suggestion. If the IRS looks at an S corporation whose owner took $150,000 out in distributions and $0 in wages, it does not shrug. It can reclassify those distributions as wages, which means back payroll taxes on money already spent, plus penalties, plus a return that now needs amending.

“Reasonable” is not a number you copy from a stranger. It is a function of what you actually do: your role, your hours, what it would cost to hire someone to do your job. A surgeon running a practice and a consultant who works ten hours a week do not share a number, no matter what the forum voted. And here is the part almost everyone skips even when they get the number roughly right: nobody wrote down how they got it. When the question comes, “reasonable” is an argument you have to be able to make, and a salary with a documented basis (comparable wage data, a description of the role, a memo in the file) wins arguments that a vibe cannot.

The distributions side has its own quiet failure mode: owners pulling money out with no tracking of basis, no record of what the account can actually support. It works fine until the year it doesn’t.

Why both misses go unnoticed

Neither of these problems announces itself. The Schedule C owner’s return is correct. Every number is right; the tax is legally owed; the software finds no errors. The return is simply answering the wrong question. A preparer whose job ends at “accurate and filed” will never flag it, because flagging it isn’t preparation, it’s advice, and advice was never on the invoice.

The badly run S corporation is quieter still. Skipping payroll doesn’t break anything in the year you skip it. The bank account doesn’t care. The problem only surfaces when someone with authority reads the return and notices that a profitable corporation apparently ran itself all year with an officer who worked for free.

The fixable part

Here is the good news, and it is real. The IRS knows the missed election is common, so there is a well-worn path back: under Rev. Proc. 2013-30, a late S-corp election on Form 2553 can reach back as far as three years and 75 days. Practically, that means a qualifying LLC reading this in the middle of 2026 can still elect S status effective January 1, 2026, and capture this entire year.

And the badly run version is fixable too: a real payroll cadence, a salary built from your actual role with the reasoning documented, distributions tracked against basis. None of it is exotic. It is maintenance, the boring kind that makes the exciting kind (an IRS reclassification) not happen.

One honest caveat, because the internet won’t give you one: this lever is not for everyone. Below roughly $80,000 to $100,000 of net profit, the fixed frictions (payroll costs, an extra return, the compliance overhead) eat most of the saving, and staying simple is the better trade. The election is a tool, not a merit badge.

But if your profit cleared that line a while ago and your return still says Schedule C, or your S corporation’s officer compensation line says zero, the pattern on your return is one we have seen many times. It is not a character flaw. It is what happens when the person paid to look at your numbers was only paid to file them.