If your business is making money, the choice between an LLC and an S-corp is one of the biggest tax levers you have. The wrong structure can cost you thousands a year in unnecessary self-employment tax; the right one keeps that money in your pocket.
What is the difference between an LLC and an S-corp?
An LLC is a legal business structure; an S-corp is a tax election. In other words, you can have an LLC that is taxed as an S-corp. A default LLC pays self-employment tax (15.3%) on all of its profit, while an S-corp lets you split your income into a reasonable salary (subject to payroll taxes) and distributions (which are not subject to self-employment tax).
How does an S-corp save on taxes?
The savings come from that split. Say your business nets $120,000. As a default LLC, you pay self-employment tax on the full amount. As an S-corp, you might pay yourself a reasonable salary of $70,000 and take $50,000 as a distribution—and that $50,000 avoids the 15.3% self-employment tax, saving you roughly $7,500 a year. The exact number depends on a reasonable-salary determination and your state.
When is an S-corp worth it?
S-corp status generally makes sense once your business is consistently profitable—many advisors use roughly $40,000-$50,000 of net profit as a rough threshold—because the tax savings need to outweigh the added costs.
- Running formal payroll for yourself
- Filing a separate S-corp tax return (Form 1120-S)
- Paying a reasonable salary you can defend to the IRS
- Extra bookkeeping and compliance
The right answer depends on your specific numbers, and the wrong salary can trigger IRS scrutiny. We model both scenarios for your business and handle the election and payroll if it makes sense—see our tax preparation & planning services.