LLC vs S-Corp: Which Saves You More on Taxes?

The one tax that drives the whole decision

Self-employment tax is the reason this decision exists. When you run a default LLC (a single-member LLC is a "disregarded entity," taxed like a sole proprietor), every dollar of net profit flows onto your personal return and is hit with 15.3% self-employment tax — 12.4% for Social Security (up to the annual wage base) plus 2.9% for Medicare — on top of ordinary income tax. That 15.3% is the employer and employee halves of payroll tax combined, and as your own boss you owe both halves.

An S-corp election changes how that profit is characterized. The IRS requires an owner who works in the business to pay themselves a reasonable salary as a W-2 employee. That salary carries the full payroll tax. But any profit left over after the salary can be taken as a distribution, and distributions are not subject to the 12.4% + 2.9% self-employment tax. You still pay income tax on the distribution — you just skip the payroll-tax layer on that slice. Estimate your own liability first with the self-employment tax calculator, then compare it to the split an S-corp would produce.

A worked example: $120,000 of profit

Suppose your business nets $120,000 in profit. As a default LLC, self-employment tax applies to 92.35% of that (the SE-tax base excludes the employer-half deduction), so roughly $110,820 is taxed at 15.3% — about $16,956 in self-employment tax. Note the Social Security portion (12.4%) only applies up to the annual wage base; the 2.9% Medicare portion has no cap.

Now elect S-corp status and pay yourself a reasonable salary of $70,000. Payroll tax (the same 15.3%, split between the company and you) applies only to that salary: about $10,710. The remaining $50,000 is a distribution with no self-employment or payroll tax. Same total profit, but the payroll-tax bill drops by roughly $6,200 before you subtract added costs.

In this scenario the S-corp saves roughly $4,400 a year after the extra overhead — real money that repeats every year the business stays profitable. Run your own figures in the LLC vs S-corp tax savings calculator to see your break-even salary and net savings.

Where the break-even actually sits

The S-corp election is not free. You have to run real payroll (a payroll service costs a few hundred dollars a year), file a separate business return (Form 1120-S), and usually pay an accountant more at tax time. Those costs commonly total $1,200 to $2,500 a year. Because the savings scale with the size of your distribution, there is a profit level below which the added cost eats the entire benefit.

As a rough guide, the election tends to pay off once net profit is reliably above $40,000 to $50,000 and you can defend a reasonable salary that still leaves a meaningful distribution. Below that, the payroll and filing overhead can exceed the payroll-tax you avoid. Above it, the savings widen the more profit you can take as distribution — within the limits of a salary the IRS considers reasonable for your role and industry.

The word doing the heavy lifting is reasonable. Pay yourself too little to inflate the tax-free distribution and you invite an IRS reclassification, back payroll taxes, and penalties. Comparable-wage data (what someone would earn doing your job for an employer) is the anchor auditors use, so keep documentation of how you set the figure — job listings, industry salary surveys, and the hours you actually work in the business.

Two other factors move the break-even for your specific situation. State taxes and fees matter: some states levy a franchise tax or an extra fee on S-corps, which raises the profit level where the election pays off. And your own time has value — if running payroll and coordinating a second tax return is a headache you would rather pay to avoid, build that into the cost side. The point is that the threshold is a range, not a single magic number, and it shifts with where you live and how you value the added administration.

Costs and trade-offs beyond the tax number

The headline savings are only part of the picture. An S-corp adds obligations that a plain LLC does not carry:

• Payroll administration — you become an employer, with quarterly 941 filings, W-2s, and state payroll accounts.
• A separate tax return — Form 1120-S plus a Schedule K-1 to yourself, which most owners hand to a professional.
• Reasonable-comp risk — set the salary defensibly or lose the benefit under audit.
• Retirement and QBI interactions — a lower salary can shrink the base for solo-401(k) contributions and can change your Qualified Business Income deduction, so the "optimal" salary is not simply the lowest one.

None of these are dealbreakers, but they explain why the election is a call to make with real numbers rather than a rule of thumb. Start by pinning down what you owe today with the self-employment tax calculator, then model the split with the LLC vs S-corp calculator. If the net savings clear your comfort threshold — many owners use $2,000 a year as a floor worth the paperwork — it is worth a conversation with a CPA to execute the election (Form 2553) correctly and on time.

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Related

• LLC vs S-Corp Tax Savings Calculator
• Self-Employment Tax Calculator