LLC vs S Corp for Taxes: Which Saves You More?

The question comes up every year for self-employed people earning good money: should I elect S Corp status to save on taxes? The internet is full of people saying it saved them $10,000+ per year, accountants saying "it depends," and confused business owners caught in the middle.

Here's the straightforward answer: S Corp election saves you money when your net profit is consistently above roughly $60,000-$80,000 per year. Below that, the additional costs and complexity usually eat the savings. Let's walk through the math.

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How LLCs Are Taxed (Default)

A single-member LLC is taxed as a sole proprietorship by default. All of your net business profit (revenue minus expenses) flows through to your personal tax return on Schedule C. You pay two types of tax on that profit:

Income tax at your marginal rate (10% to 37% depending on total income).

Self-employment tax at 15.3% on the first $168,600 of net earnings (2026 threshold), then 2.9% on everything above that. Self-employment tax covers Social Security (12.4%) and Medicare (2.9%). You get to deduct half of this on your income tax return, but you still pay the full amount.

The self-employment tax is the key number. On $100,000 of net profit, you're paying roughly $14,130 in self-employment tax alone, on top of income tax. That's the number that makes people start Googling "S Corp."

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How S Corps Are Taxed

An S Corp is not a different business entity. It's a tax election. Your LLC stays the same legally. You file Form 2553 with the IRS and elect to be taxed as an S Corporation instead of a sole proprietorship.

The critical difference: with an S Corp, you split your business profit into two buckets.

Salary that you pay yourself through actual payroll. This portion is subject to both income tax and payroll taxes (the employer and employee shares of Social Security and Medicare, which total 15.3%, same as self-employment tax).

Distributions which are the remaining profit after salary. This portion is subject to income tax only. No self-employment or payroll tax on distributions.

The savings come from the distributions. Every dollar you can legitimately classify as a distribution instead of salary avoids 15.3% in payroll taxes (up to the Social Security wage base).

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The Math with Real Numbers

Let's say your LLC nets $120,000 per year after business expenses.

As a default LLC (sole proprietorship):

Self-employment tax on $120,000: approximately $16,956. Plus income tax at your marginal rate on the full $120,000 (minus the above-the-line deduction for half of SE tax).

As an S Corp with $60,000 salary:

Payroll taxes on $60,000 salary: approximately $9,180 (employer + employee shares). The remaining $60,000 taken as a distribution: zero payroll tax. Plus income tax on the full $120,000 (salary + distributions are both subject to income tax).

The savings:

$16,956 minus $9,180 = approximately $7,776 per year in payroll tax savings.

That's real money. But it's not the whole picture.

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The Costs of S Corp Status

S Corp election comes with additional costs and complexity that reduce the net savings:

Payroll processing. You must run actual payroll for yourself. This means payroll software ($40-50/month with Gusto or OnPay) or a payroll service. That's $480-600/year.

Additional tax filing. S Corps file their own tax return (Form 1120-S) in addition to your personal return. If you use an accountant, expect to pay $1,000-2,500 more per year for the S Corp return. If you file yourself, expect to spend significantly more time.

Payroll tax filings. Quarterly payroll tax returns (Form 941), annual wage reporting (W-2, W-3), and state payroll filings add administrative burden and cost.

Reasonable compensation requirement. The IRS requires that you pay yourself a "reasonable salary" before taking distributions. If you set your salary too low, the IRS can reclassify distributions as salary and charge back payroll taxes plus penalties. "Reasonable" means what someone with your skills and experience would earn doing similar work. You can't pay yourself $20,000 salary on $200,000 of profit.

State-level costs. Some states charge additional taxes or fees for S Corps. California, for example, charges an $800 minimum franchise tax plus a 1.5% tax on S Corp income. These state costs can significantly erode the federal savings.

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When S Corp Makes Sense

After accounting for costs, S Corp election typically makes financial sense when:

Your net profit is consistently above $60,000-$80,000. Below this range, the payroll costs, additional accounting fees, and administrative complexity eat most or all of the tax savings. At $50,000 net profit, you might save $3,000 in payroll taxes but spend $2,000-3,000 on payroll software and accounting. Net benefit: zero to slightly negative.

Your income is stable and predictable. If your income swings wildly year to year, the reasonable compensation calculation becomes complicated and the S Corp structure may not produce consistent savings.

You're willing to handle the additional administration. Running payroll, filing additional returns, maintaining corporate formalities. If this sounds miserable, the tax savings might not be worth the cognitive burden.

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When to Stay as a Default LLC

Your net profit is below $60,000. The math doesn't work. Stay simple.

You're in the early stages of your business. If your income is growing but not yet consistent, wait until you have a clear picture of annual profit before committing to S Corp structure.

You're a solo freelancer who values simplicity. Some people would rather pay the extra self-employment tax than deal with payroll, additional tax returns, and the reasonable compensation question. That's a valid choice.

You live in a state that penalizes S Corps. Check your state's treatment. California, New York City, and several other jurisdictions add costs that reduce federal savings.

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How to Make the Election

If you've decided S Corp is right for you:

File Form 2553 with the IRS. For a new LLC, file within 75 days of formation. For an existing LLC, file by March 15 to have the election apply to the current tax year. Late elections are sometimes accepted with reasonable cause.

Set up payroll immediately. Gusto or OnPay are the easiest options. You'll run payroll for yourself on a regular schedule (biweekly or monthly).

Open a business checking account if you haven't already. S Corp formalities require clear separation between business and personal finances. See our recommendations here.

Hire an accountant or at minimum consult one. The reasonable compensation determination and Form 1120-S filing are areas where professional guidance pays for itself. A bad reasonable compensation number can trigger an audit.

You can also use an LLC formation service like ZenBusiness or LegalZoom to handle the S Corp election paperwork if you want guidance through the process.

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Bottom Line

S Corp election is a real tax savings tool, not a gimmick. But it's not free. The sweet spot is net profit above $80,000 where the payroll tax savings clearly outweigh the additional costs and complexity. Below that, the default LLC structure is simpler, cheaper to maintain, and nearly as tax-efficient.

The best move: talk to a CPA who works with small businesses and self-employed clients. Show them your last two years of tax returns and ask them to model the S Corp savings against the costs for your specific situation. A good accountant will give you a clear number, not a vague "it depends."