S-Corp Election and Getting the Health Insurance Piece Right in Year One

Posted Monday, July 6, 2026

The Situation

Noah and Shree from Colorado are in their first full year running a digital services business on their own. They met with Rachael Weber, CPA, Parter at WCG CPAs & Advisors and Aria Klooster, CPA.

Noah had left his W-2 job in the spring, a large contract just landed, and the business was projecting $200-225K in net profit for 2026. They came to WCG for their first real tax planning session with a question most new business owners ask: when does the S Corp election make sense, and how does it actually work?

Running as a sole proprietor at $200K in profit means 15.3% self-employment tax on every dollar of net income. WCG’s rule of thumb: the S Corp election breaks even around $50K in profit, starts generating real savings around $100K (roughly $10K annually), and compounds from there. At $200K, the decision was straightforward.

WCG filed a late S Corp election (Form 2553) retroactive to January 1, 2026, covering the entire year. Reasonable officer compensation came in at $85K, leaving approximately $115K flowing as distributions and exempt from FICA.

The Strategy

The less obvious piece came from the health insurance. Noah and Shree are on COBRA coverage at $1,800/month while expecting their first child, due in November. WCG structured those premiums into Noah’s officer compensation. Health insurance for S Corp shareholder-employees counts as wages for federal income tax purposes but is not subject to Social Security and Medicare taxes. The result: actual FICA exposure dropped from $85K down to closer to $70K, a meaningful reduction built right into the payroll structure.

Two additional decisions came out of the session: only Noah on payroll for year one (modest but real unemployment tax savings), and no Colorado PTET election. Colorado wrote its pass-through entity tax rules in a way that rarely makes sense for S Corp owners below $500K in income. Electing it here would have cost more than it saved.

The Outcome

A full-year S Corp election, a calibrated officer salary, and health insurance premiums routed correctly through payroll from day one. WCG will deliver the full tax plan and projection in a few weeks. This is what proactive tax planning looks like when you start the year right.

Total Taxes Saved

$8,425

for 2026 (due to Noah’s previous W-2 job) and

$18,600

for 2027

 


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