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Tax strategy for business owners and founders in New Jersey and New York

By Claud Cornetti, CPA · Licensed in New Jersey and New York

Updated 19 October 2026

Is my business set up the right way?

An LLC is a legal entity, not a tax classification. By default, a one-owner LLC is ignored for federal income tax, and an LLC with two or more owners is taxed as a partnership. Either can elect to be taxed as an S corporation or a C corporation.

Each option taxes profit differently. In a one-owner LLC or a partnership, profit flows to your personal return, and owners who work in the business generally pay self-employment tax on it. An S corporation also passes profit through, but a working owner takes a salary, and only the salary carries payroll tax. A C corporation pays a flat 21% on its own profit, and dividends are taxed again when they reach you. Qualified small business stock can exclude part or all of the gain when you sell.

A change makes sense when something real changes: profit grows, you add partners, you raise money or you plan a sale. An S corporation can have no more than 100 shareholders and one class of stock. Partnerships, corporations and nonresident aliens can't own its shares.

When does an S-corp election make sense?

The potential savings come from self-employment tax. As the sole owner of an LLC, you pay 15.3% on 92.35% of your net earnings. That's 12.4% for Social Security up to the 2026 wage base of $184,500, plus 2.9% for Medicare with no cap. In an S corporation, payroll tax applies only to your salary. Profit above a reasonable salary passes through without it.

That comes with costs: payroll every pay period, a separate federal return (Form 1120-S), state filings and minimum taxes, and in New York City a corporate tax that ignores the election. Your salary also lowers the qualified business income deduction. Below some profit level, the costs can outweigh the tax difference. Where that line sits depends on your salary and where you operate. We compare both versions with your numbers first.

Form 2553 is due within 2 months and 15 days after the start of the tax year it should cover (March 15 for a calendar-year company), or any time in the year before. Revenue Procedure 2013-30 offers late-election relief if you meet its conditions.

What is a reasonable salary for me?

The IRS expects an S corporation owner who works in the business to receive reasonable compensation before taking distributions. If the salary is too low, the IRS can treat distributions as wages and assess payroll taxes, penalties and interest.

There's no formula. The IRS looks at your experience, duties and time, and at what comparable businesses pay for similar work. We set the salary against market data for your role and region, document how we got there and revisit it when profit changes.

How do New Jersey and New York treat my company?

New Jersey follows the federal S election. Under P.L. 2022, c.133, a federal S corporation registered in New Jersey is a New Jersey S corporation without a separate state election. It files Form CBT-100S and pays a minimum tax based on New Jersey gross receipts. Shareholders can choose C corporation treatment instead through the C Corporation Tax Status Election, with every shareholder's consent.

New York State needs its own election on Form CT-6, generally by the 15th day of the third month of the tax year; without it, the company is taxed as a regular corporation. New York City doesn't recognize S corporations at all and taxes them under the General Corporation Tax.

Does the BAIT election help me?

New Jersey's Business Alternative Income Tax (N.J.S.A. 54A:12-1 et seq.) lets a partnership, S corporation or LLC taxed as either pay New Jersey income tax at the entity level, if at least one owner is subject to New Jersey income tax. Owners get a refundable credit on their own New Jersey returns, and the entity deducts the tax federally, outside the individual SALT cap. New York's pass-through entity tax (Tax Law Article 24-A) works on the same idea, and New York City has a version for city residents (Article 24-B).

Whether it helps depends on where you sit under the SALT cap. For 2026 the cap is $40,400, and it shrinks for modified AGI above $505,000 until it reaches $10,000. Owners in or above that range, and owners whose state and local taxes exceed the cap, are the usual candidates. Read our full answer on the 2026 SALT cap.

The New Jersey election for 2026 stays open until March 15, 2027. It must be in place before the entity makes any payment, and the entity generally deducts the tax in the year it pays. New York's 2026 election closed on March 16, 2026. The 2027 election opens on January 1, 2027. New York's deadline has been March 15, and proposals to move it later keep coming up, so we confirm the date each year.

Can I pay family members?

Yes, when the work is real and the pay is what you'd pay an outsider for it. Run it through payroll, issue a W-2 and keep a job description and time records.

The payroll tax depends on the entity. Some children are exempt when they work for a parent's sole proprietorship (including a one-owner LLC) or a partnership owned only by their parents. Under 18, they owe no Social Security or Medicare tax. Under 21, the business owes no federal unemployment tax on their pay. If the employer is an S corporation, a C corporation or a partnership with any other partner, the usual employment taxes apply at any age.

I run more than one entity. What should I watch?

A common setup is an operating company plus a separate LLC that owns the building, sometimes with a management company billing the others. Every transaction between them needs a business reason, an arm's-length price, a written agreement and invoices. The IRS can reallocate income between businesses under common control and deny fees that aren't ordinary and necessary.

The qualified business income deduction, generally 20%, is now permanent under Pub. L. 119-21. For 2026, its wage and property limits phase in above $403,500 of taxable income on a joint return ($201,750 for most other filers). Service businesses such as law, health and consulting lose it above the phase-in range.

What to bring to the first call

• Business and personal tax returns for the last two years, for every entity
• Formation documents and any elections on file, such as Form 2553, Form CT-6 or a BAIT or PTET election
• This year's payroll reports, including what you pay yourself
• A year-to-date profit and loss statement and balance sheet for each company
• Operating or shareholder agreements
• If you own more than one company, a chart of who owns what and which company pays which

Questions we hear

Should I switch my LLC to an S corp?

It depends on your profit, the salary you'd need to pay yourself and whether you do business in New York City. Below a certain profit, payroll and the extra filings can cost more than the tax difference. We run both versions with your numbers before recommending a switch.

Can I pay myself a small salary and take the rest as distributions?

Not safely. The IRS can reclassify distributions as wages and add penalties and interest. Your salary should hold up next to what the role would cost on the open market.

My company is in New York City. Does an S election still help?

Not at the city level, because the city taxes federal S corporations under the General Corporation Tax. It can still help federally and in New York State, so we model all three together.

This page is general information about the rules in effect for 2026. It is not tax advice for your situation, and reading it does not make you a client. See our Terms of Use.