Last month I analyzed a $120,000 consulting business. The owner was paying $18,378 in self-employment tax as an LLC. As an S-Corp with $60,000 salary? $9,180. That’s $9,198 back in her pocket. Every year.
“Should I be an LLC or S-Corp?” isn’t quite right. The better question is: “Should my LLC elect S-Corp taxation?”
An LLC is a legal entity. S-Corp is a tax classification. They’re not mutually exclusive. Most small businesses that benefit from S-Corp taxation start as LLCs and simply elect to be taxed as an S-Corp. They get the legal simplicity of an LLC with the tax savings of an S-Corp.
This guide breaks down the math, costs, and the specific threshold where S-Corp election makes sense.
Key Takeaways
- Both LLCs and S-Corps provide liability protection and pass-through taxation
- Key difference: S-Corps require reasonable salary + payroll taxes; LLC profits are fully subject to self-employment tax (15.3%)
- S-Corps can save 15.3% self-employment tax on profits above reasonable salary
- Rule of thumb: S-Corp makes sense when profits exceed $40,000-50,000 after owner salary
- S-Corps must file Form 1120-S; single-member LLCs file Schedule C (or elect S-Corp treatment)
- Both qualify for QBI deduction (20%), but S-Corp salary is NOT QBI-eligible income
- S-Corps require payroll (~$500-2,000/year cost); LLCs do not
- LLCs can elect S-Corp taxation without changing legal structure (Form 2553)
Table of Contents
The Fundamental Difference
Before diving into numbers, let’s clear up what these terms actually mean.
Both Provide Liability Protection
LLCs and S-Corps both protect your personal assets from business debts and lawsuits. If someone sues your business, they can’t take your house or personal savings (assuming you maintain proper separation).
This protection exists whether you:
- Form an LLC
- Form a corporation and elect S-Corp status
- Form an LLC and elect S-Corp taxation
The liability question is separate from the tax question. Don’t choose a structure based on liability protection. Both options protect you equally.
Both Offer Pass-Through Taxation
Neither LLCs (by default) nor S-Corps pay federal income tax at the entity level. Instead, profits “pass through” to the owners’ personal tax returns.
- LLC: Income passes to your personal return via Schedule C (single-member) or Schedule K-1 (multi-member)
- S-Corp: Income passes via Schedule K-1
You pay taxes at your individual rate. No double taxation like C-Corporations. This is true for both structures.
The Real Difference: Self-Employment Tax
Here’s where the money is.
LLC (default taxation): ALL profits are subject to self-employment tax. That’s 15.3% on the first $168,600 (2024), then 2.9% above that threshold. Make $100,000 in profit? You pay roughly $14,130 in self-employment tax before your regular income tax.
S-Corp: Only your salary is subject to payroll taxes. Profits distributed above your salary? No self-employment tax.
This is the entire reason S-Corps exist for most small business owners. Not liability. Not complexity. Just this one tax difference.
Learn more in our S-Corporation Tax Guide. For a broader overview including C-Corps, see our Business Entity Tax Guide.
How LLC Taxation Works
Understanding LLC taxation helps you see exactly what changes with S-Corp election.
Default Tax Treatment
Single-member LLC: The IRS treats you as a “disregarded entity.” Your business doesn’t file its own return. All income and expenses go on Schedule C of your personal Form 1040. Simple.
Multi-member LLC: The IRS treats you as a partnership. The LLC files Form 1065 (informational return), and each member receives a Schedule K-1 showing their share of income.
In both cases, all net income is self-employment income.
LLC Tax Calculation Example
Let’s say your LLC earns $100,000 in net profit.
Self-employment tax calculation:
- Net profit: $100,000
- SE tax base (92.35% of net): $92,350
- SE tax rate: 15.3%
- SE tax: $14,130
You’ll also pay income tax on the full $100,000 at your marginal rate. But that $14,130 in SE tax? You pay that on top of income tax.
Advantages of LLC Default Taxation
LLCs taxed as disregarded entities or partnerships have real advantages:
- Simple compliance: No payroll to run, no quarterly deposits, no W-2s
- No separate return: Single-member LLCs just file Schedule C
- Lower accounting costs: Less complexity means lower CPA bills
- Flexibility: Distribute profits however and whenever you want
- No salary requirements: Pay yourself nothing or everything
Disadvantages of LLC Default Taxation
The flip side:
- SE tax on entire profit: Every dollar of profit gets hit with 15.3%
- No income splitting: Can’t separate salary from distributions
- Higher tax burden: At higher income levels, you’re leaving money on the table
For a $50,000 business, the simplicity might win. For a $150,000 business, you’re likely overpaying by thousands.
How S-Corp Taxation Works
S-Corp taxation introduces one critical change: income splitting.
Pass-Through with a Twist
Like an LLC, S-Corps don’t pay federal income tax. Profits pass through to shareholders. But here’s the twist:
Your income gets split into two buckets:
- Salary: Subject to payroll taxes (Social Security + Medicare)
- Distributions: NOT subject to payroll/SE taxes
The IRS requires you to pay yourself a “reasonable salary” for the work you do. Everything above that reasonable salary can be taken as a distribution with no employment taxes.
S-Corp Tax Calculation Example
Same $100,000 profit. Now as an S-Corp with a $50,000 reasonable salary:
Payroll taxes on salary:
- Social Security (12.4% combined): $6,200
- Medicare (2.9% combined): $1,450
- Total: $7,650
Taxes on $50,000 distribution:
- Payroll/SE tax: $0
Total employment taxes: $7,650
Compare that to the LLC’s $14,130 in self-employment tax. That’s a $6,480 annual savings.
S-Corp Requirements
This tax treatment comes with strings attached:
- Reasonable salary required: The IRS mandates you pay yourself market-rate compensation for your services. You can’t pay $10,000 salary and take $90,000 in distributions.
- Actual payroll required: You need to run payroll. Withhold taxes. File quarterly Form 941. Issue yourself a W-2.
- Form 1120-S: The S-Corp files its own tax return by March 15 for calendar year filers.
- K-1s issued: Each shareholder receives a Schedule K-1 showing their share of income.
S-Corp Reasonable Compensation Guide | Calculate Your S-Corp Savings
The Self-Employment Tax Savings Math
Let’s get specific about the numbers.
Breaking Down the 15.3%
Self-employment tax (for LLCs) and payroll tax (for S-Corps) fund Social Security and Medicare:
- Social Security: 12.4% (6.2% employee + 6.2% employer, or full 12.4% for self-employed)
- Medicare: 2.9% (1.45% + 1.45%, or full 2.9% for self-employed)
- Additional Medicare: 0.9% on wages/SE income above $200,000 (single) or $250,000 (married)
- Social Security wage base: $168,600 in 2024 (only income up to this amount is subject to the 12.4%)
When you’re self-employed (LLC), you pay both the employee AND employer portions. That’s the full 15.3%.
Real Savings Scenarios
Scenario 1: $75,000 Net Profit
| Factor | LLC | S-Corp ($40K Salary) |
|---|---|---|
| SE/Payroll Tax | $10,597 | $6,120 |
| Gross Savings | — | $4,477 |
| Payroll/Compliance Costs | $0 | ~$1,200 |
| Net Savings | — | $3,277 |
At $75,000 profit, S-Corp election saves about $3,277 after compliance costs. Meaningful, but you need to weigh the added complexity.
Scenario 2: $150,000 Net Profit
| Factor | LLC | S-Corp ($75K Salary) |
|---|---|---|
| SE/Payroll Tax | $21,068 | $11,475 |
| Gross Savings | — | $9,593 |
| Payroll/Compliance Costs | $0 | ~$1,500 |
| Net Savings | — | $8,093 |
At $150,000 profit, the math is obvious. S-Corp saves over $8,000 annually. Over five years, that’s $40,000+.
Scenario 3: $250,000 Net Profit
| Factor | LLC | S-Corp ($100K Salary) |
|---|---|---|
| SE/Payroll Tax | $30,236 | $15,300 |
| Gross Savings | — | $14,936 |
| Payroll/Compliance Costs | $0 | ~$2,000 |
| Net Savings | — | $12,936 |
At $250,000, S-Corp saves nearly $13,000 per year after costs. The compliance burden becomes negligible relative to savings.
Use our S-Corp Tax Calculator to model your specific situation.
The QBI Deduction Factor
The Qualified Business Income (QBI) deduction complicates the analysis. Most articles skip this. That’s a mistake.
What is QBI?
Section 199A of the tax code allows a 20% deduction on qualified business income. If your business earns $100,000 in qualified income, you can potentially deduct $20,000 from your taxable income.
Both LLCs and S-Corps qualify for QBI. But there’s a catch.
The S-Corp QBI Catch
S-Corp salary is NOT QBI-eligible income.
Only your distributions count toward the QBI deduction. Higher salary means lower QBI deduction.
Example:
- $150,000 profit as LLC: Full $150,000 eligible for QBI (potential $30,000 deduction)
- $150,000 profit as S-Corp with $75K salary: Only $75,000 eligible for QBI (potential $15,000 deduction)
You lose $15,000 in QBI deduction. At a 24% marginal rate, that’s $3,600 in additional tax.
The Bottom Line on QBI
Here’s the math that matters:
- SE tax savings from S-Corp: ~$9,593 (in the $150K example)
- Lost QBI deduction value: ~$3,600 (at 24% bracket)
- Net advantage still favors S-Corp: ~$6,000
SE tax savings almost always exceed the QBI impact. But you can’t ignore it. Model BOTH factors.
When to Make the Switch
Not everyone should be an S-Corp. Here’s how to decide.
The $40,000-$50,000 Rule of Thumb
Below $40,000 profit: S-Corp rarely makes sense. Compliance costs eat your savings. Keep the LLC simplicity.
$40,000-$60,000 profit: Run the numbers carefully. It depends on your specific situation, state taxes, and tolerance for complexity.
Above $60,000 profit: S-Corp typically saves money. The higher your profit, the more you save.
These are rough guidelines. Your situation may differ based on several factors.
Factors That Lower the Threshold
You might benefit from S-Corp election at lower profit levels if:
- Low salary requirements: Simple business with modest comparable salaries
- DIY payroll capability: You can run payroll yourself (Gusto, etc.)
- Already paying for business return prep: Adding S-Corp doesn’t cost much more
- High state income tax: SE deduction provides less benefit in high-tax states
Factors That Raise the Threshold
You might need higher profits before S-Corp makes sense if:
- High salary requirements: Professionals (attorneys, doctors, consultants) often have high comparable salaries
- Need full-service payroll: Outsourcing adds cost
- Multiple state filings: More complexity, more fees
- Irregular income: Hard to set appropriate salary when income fluctuates wildly
The Break-Even Calculation
S-Corp compliance costs typically run $2,000-4,500 per year:
- Payroll service: $500-2,000
- Form 1120-S preparation: $500-1,500
- State compliance: $0-800
- Additional bookkeeping: $200-500
You need SE tax savings to exceed these costs.
At 15.3% SE tax rate, you need roughly $13,000-29,000 in distributions (profit above salary) to break even on a $2,000-4,500 cost structure.
Add that to your reasonable salary requirement, and you get your minimum profit threshold.
Decision Framework:
- Estimate annual profit
- Determine reasonable salary requirement
- Calculate SE savings on distributions
- Subtract S-Corp compliance costs
- If positive and significant: Elect S-Corp
Not sure where you stand? Calculate your S-Corp savings now
Side-by-Side Comparison
| Factor | LLC (Default) | S-Corp |
|---|---|---|
| Liability Protection | Yes | Yes |
| Pass-Through Taxation | Yes | Yes |
| Self-Employment Tax | On all profits | On salary only |
| Required Salary | No | Yes (reasonable) |
| Payroll Required | No | Yes |
| Tax Return | Schedule C or Form 1065 | Form 1120-S |
| Accounting Complexity | Low | Medium |
| Annual Compliance Cost | $500-1,500 | $2,000-4,500 |
| QBI Deduction | On all profit | On distributions only |
| Ownership Flexibility | Unlimited members | 100 shareholders max |
| Stock Classes | Flexible | One class only |
| Foreign Owners | Allowed | Not allowed |
| Health Insurance | No special treatment | W-2 addition required |
| Best For | Under $50K profit | Over $50K profit |
LLC with S-Corp Election: Best of Both Worlds?
You don’t need to form a corporation to get S-Corp tax treatment.
Keep Your LLC, Change Your Taxes
Most small businesses that want S-Corp benefits take this path:
- Form an LLC (or keep your existing LLC)
- File Form 2553 with the IRS
- Get taxed as an S-Corp while remaining an LLC legally
Your state still sees you as an LLC. You’re still governed by your operating agreement. But the IRS treats you as an S-Corp for tax purposes.
What Changes
- Tax treatment: File Form 1120-S instead of Schedule C
- Payroll requirement: Must run payroll and issue yourself a W-2
- K-1 distribution: Receive Schedule K-1 for your share of income
What Stays the Same
- Legal structure: Still an LLC under state law
- Operating agreement: Still governs your business
- Liability protection: Unchanged
- Registered agent: Same requirements
- State filings: Same annual reports
The Process
- Ensure your LLC operating agreement allows S-Corp election (most do)
- File Form 2553 with the IRS by March 15 for current year (calendar year taxpayers)
- Set up payroll for owner-employees
- File Form 1120-S going forward
Complete guide to Converting LLC to S-Corp
The Real Costs of S-Corp Status
Let’s break down what S-Corp actually costs beyond the obvious.
Startup Costs
- Payroll system setup: $0-500 (many services have free setup)
- State registrations: Varies by state (unemployment insurance, workers’ comp)
- Accounting system updates: Minimal if you’re already using QuickBooks or similar
Ongoing Annual Costs
| Cost | Range | Notes |
|---|---|---|
| Payroll service | $500-2,000 | Gusto, ADP, Patriot, etc. |
| Form 1120-S preparation | $500-1,500 | CPA fees |
| State compliance | $0-800 | Varies significantly by state |
| Bookkeeping increase | $200-500 | More complexity |
| Total | $1,200-4,800 |
Hidden Costs to Consider
Beyond direct fees:
- Your time: Managing payroll, reviewing reports, coordinating with accountant
- Quarterly payroll tax deposits: Must be timely or penalties apply
- Workers’ compensation: Required in most states for employees (including yourself in some states)
- State unemployment insurance: Required registration and quarterly filings
- Year-end W-2 processing: Must issue by January 31
The Real Question
Do SE tax savings exceed these costs?
$150,000 profit: Saves ~$8,000 after costs. Absolutely worth it.
$50,000 profit: Saves ~$1,500 after costs. Worth the hassle? Depends on your tolerance for complexity.
$35,000 profit: Might break even or cost you money. Probably not worth it.
Common Mistakes When Comparing LLC vs S-Corp
Mistake 1: Comparing Apples to Oranges
“Should I be an LLC or S-Corp?” implies these are mutually exclusive choices. They’re not.
Reality: An LLC can elect S-Corp taxation. You can have both. Most S-Corps are actually LLCs with an S-Corp tax election.
Mistake 2: Ignoring All Costs
The internet is full of articles showing massive tax savings from S-Corp election. They often ignore:
- Payroll service costs
- Increased accounting fees
- Your time
- State-specific costs
Factor in ALL costs before deciding.
Mistake 3: Setting Salary Too Low
The temptation: Pay yourself $20,000 salary and take $80,000 in distributions. Maximum savings, right?
The problem: The IRS requires “reasonable compensation.” If you’re a $100,000/year consultant, $20,000 salary isn’t reasonable. The IRS can reclassify your distributions as wages, hit you with back taxes, penalties, and interest.
Aggressive tax savings = audit risk. S-Corp Reasonable Compensation Guide
Mistake 4: Not Considering Income Variability
S-Corp works best with predictable income. You need to set a reasonable salary at the start of the year and stick to it.
If your income swings wildly ($30,000 one year, $150,000 the next), salary planning becomes difficult. You might set salary too high in a bad year or too low in a good year.
Mistake 5: Forgetting About QBI
As discussed above, S-Corp election reduces your QBI deduction. Many calculators ignore this. Model both factors together.
Frequently Asked Questions
Is LLC or S-Corp better for taxes?
S-Corp typically saves taxes when profit exceeds $40,000-50,000 after reasonable salary. Below that threshold, LLC’s simpler compliance often wins. Use our S-Corp calculator to model your specific situation.
Can an LLC be taxed as an S-Corp?
Yes. File Form 2553 with the IRS to elect S-Corp taxation while keeping your LLC legal structure. This is the most common approach for small businesses.
How much do you save with an S-Corp?
Savings depend on profit and salary. A $150,000 profit business typically saves $8,000-10,000 annually after S-Corp compliance costs. Higher profit = higher savings.
What is the S-Corp salary requirement?
The IRS requires “reasonable compensation” for shareholder-employees. There’s no fixed percentage. It depends on duties, experience, and comparable market rates. See our Reasonable Compensation Guide.
Do I need payroll as an S-Corp?
Yes. S-Corp owner-employees must receive W-2 wages through proper payroll. No exceptions. This is non-negotiable.
Can I switch from LLC to S-Corp?
Yes, by filing Form 2553. The deadline is March 15 for current-year election (calendar year taxpayers). Late election relief is available in some cases. See our LLC to S-Corp Conversion Guide.
What is the QBI deduction?
The Qualified Business Income deduction (Section 199A) allows a 20% deduction on eligible business income. Both LLCs and S-Corps qualify, but S-Corp salary doesn’t count as QBI. See our QBI Deduction Guide.
Is S-Corp worth it for a single-member LLC?
It can be. Single-member LLCs with over $50,000 in profit often benefit from S-Corp election. The key factors are profit level, salary requirements, and your tolerance for administrative complexity.
When should I make the S-Corp election?
When consistent profit exceeds $40,000-50,000 after reasonable salary AND you’re comfortable with payroll requirements. Don’t elect too early. The deadline is March 15 for calendar-year taxpayers.
What are the disadvantages of S-Corp?
Increased complexity, payroll requirements, stricter compliance rules, reduced QBI deduction, and ongoing costs ($2,000-4,500/year). For lower-profit businesses, these costs can outweigh tax savings.
Next Steps
Ready to Decide?
- Calculate your potential savings: S-Corp Tax Calculator
- Understand salary requirements: S-Corp Reasonable Compensation Guide
- Learn the election process: Converting LLC to S-Corp Guide
- Get professional guidance: Schedule a consultation
We analyze LLCs and S-Corps every week. The answer isn’t always obvious. It depends on your specific numbers, your state, your tolerance for complexity, and your growth trajectory.
If you’re on the fence or want someone to run the numbers for your specific situation, we can help. Our team models the complete picture: SE tax savings, QBI impact, compliance costs, and state-specific factors. We’ll give you a clear recommendation based on your actual numbers, not rules of thumb.