The S-corp question.
An S-corp election changes how much of a mining profit is exposed to self-employment tax. It also adds a payroll obligation, a second tax return and a judgement call the IRS is entitled to disagree with.
3 min readWhat the election actually changes.
Run a profitable activity as a sole proprietor or through a single member LLC that is disregarded, and the whole of the net earnings is exposed to self-employment tax. That is 12.4% for the Social Security portion up to an annually indexed wage base, plus 2.9% for Medicare with no ceiling, before you reach your income tax bracket at all.
Elect S-corp treatment and the profit is split in two. You become an employee of your own company and take a salary, which carries payroll tax in the ordinary way. What remains is distributed to you as a shareholder, and shareholder distributions are not subject to self-employment tax.
That is the whole of the mechanism. Everything else about this subject is argument over where the line between the two sits.
Reasonable compensation is the load-bearing part.
The salary has to be reasonable compensation for the services you actually perform. It is not a number you pick to produce an outcome, and it is the point on which these arrangements are most often challenged.
There is no safe percentage
You will see rules of thumb quoted as though they were law. They are not in the code, they are not in the regulations, and they will not defend a position on their own.
It is a facts test
What comparable people are paid for comparable work, what you actually do, how much time it takes, and what the company would have to pay someone else to do it.
Set it too low
The IRS can recharacterise distributions as wages, with back payroll tax, interest and penalties. This litigation exists and the taxpayer usually loses.
Set it too high
The election stops doing anything useful. You have taken on payroll and a second return for no benefit.
The tension nobody mentions.
Here is the part that matters specifically for mining, and it is the reason I raise this subject carefully rather than as a technique.
Reasonable compensation presumes you are performing genuine services for the company. The material participation tests under section 469 ask a closely related question, and if you are bringing in outside support precisely so that the activity does not take much of your time, then you are arguing two things at once: that your services justify a salary, and that they are modest enough that this is not a demanding commitment.
Those positions are not automatically inconsistent, and plenty of owners hold both defensibly. But they need to be held deliberately and documented the same way, because they draw on the same facts. If your involvement is genuinely minimal, an S-corp election is a smaller opportunity than it looks and the passive activity question is the more pressing one.
What it costs to run.
Payroll
Registration, filings, withholding deposits on a schedule, W-2s at year end. Usually a monthly service cost.
A second return
Form 1120-S for the company, plus the K-1 that carries the result to your personal return. Preparation costs more than a schedule on your 1040.
State treatment
Not every state respects the federal election the same way, and some impose their own entity level tax or fee regardless.
Less flexibility
S-corps have restrictions on who may hold shares and how many classes of stock exist. If you might later bring in an investor or a different kind of holder, this constrains you.
Below a certain level of profit those fixed costs exceed the payroll tax difference and the election loses money. Where that crossover sits depends on your profit, your state and what your accountant charges, which is why the honest answer to whether it is worth it is that it depends and someone has to do the arithmetic on your actual numbers.
This is your accountant’s call, not mine.
I am not going to tell you to make this election. I do not prepare returns, I do not set reasonable compensation, and the consequences of getting either wrong land on you rather than on me.
What I will do is make sure the underlying activity is documented well enough that your accountant can reach a view: production statements by month, hardware invoices and serials, hosting costs by site, and a clear record of what I do and what you do. That last one is more useful than it sounds, because it is exactly the evidence both of these questions turn on.
Bring your accountant into it early.
Thirty minutes on your capital, your timeline and your entity. If the entity question is the reason you are here, I will tell you what your accountant will need from me and what I cannot answer. You can also read how mining income is taxed.
Book a discovery call No cost. No obligation. No follow-up sequence.