LLC vs S-Corp: Which Saves You More in Taxes?
Most profitable LLCs are leaving thousands on the table every year. The S-Corp election shifts your self-employment tax burden from all profits to salary only. Run the numbers for your business below.
Tax Savings Calculator
Enter your numbers to see the exact tax difference between LLC and S-Corp.
The S-Corp Tax Trick Explained
This is the core reason business owners elect S-Corp status. Here is how it works in plain English.
You own a business making $150,000 in profit after expenses.
As an LLC, you pay 15.3% SE tax on the full $150,000.
$150,000 x 15.3% = $22,950 SE tax
As an S-Corp, you pay yourself an $80,000 salary and take the remaining $70,000 as a distribution.
SE tax on $80,000 salary = $12,240. SE tax on $70,000 distribution = $0.
Annual savings before costs: $10,710.
After payroll and accounting costs of roughly $2,000/year, you save approximately $8,710 net per year.
IRS Audit Warning: Reasonable Salary Requirement
The IRS requires your S-Corp salary to be "reasonable." If you pay yourself $20,000 on $150,000 profit, you will get audited. The IRS looks at what similar roles pay in your market. A common rule of thumb is 40-60% of profit for service businesses. Too low a salary is the most common S-Corp audit trigger.
LLC vs S-Corp: Full Comparison
12 key differences every business owner should know
| Factor | LLC | S-Corp |
|---|---|---|
| Formation cost | $50-$500 state filing fee | Same LLC cost + IRS Form 2553 (free to file) |
| Annual overhead | $0-$800 state annual report fee | $1,000-$3,000 extra (payroll service + CPA for 1120-S) |
| Self-employment tax | 15.3% on ALL net profit | Only on salary, not distributions |
| Payroll requirement | None. You take owner draws. | Required. Must run payroll and pay yourself a W-2 salary. |
| Tax return | Schedule C on your personal 1040 | Separate Form 1120-S plus K-1 to personal return |
| Complexity | Simple. No payroll, one tax return. | Quarterly payroll taxes, W-2 at year end, extra CPA fees |
| Liability protection | Yes, same protection as S-Corp | Yes. The S-Corp election does NOT change your liability shield. |
| Number of owners | Unlimited members | Max 100 shareholders. All must be US citizens or residents. |
| Ownership flexibility | Flexible profit allocations regardless of ownership % | One class of stock only. Distributions must be proportional. |
| Investor compatibility | Can bring in VCs, foreign investors, other entities | Cannot have corporate shareholders or foreign investors |
| State recognition | Recognized in all 50 states | Most states follow federal, but CA and NYC have extra taxes |
| Health insurance deduction | Deducted as self-employed health insurance on Schedule 1 | Included in W-2 wages, then deducted on Schedule 1 |
When to Make the Switch
The S-Corp election makes financial sense only when tax savings exceed extra costs. Here is the threshold.
The math at different profit levels
$40,000 profit: SE tax savings of roughly $2,000-$3,000, minus $2,000 extra costs. You are breaking even. Not worth the complexity.
$60,000 profit: Saves roughly $4,000 in SE tax, minus $2,000 costs. Net $2,000 benefit. Marginal but positive.
$100,000 profit: Saves roughly $7,500-$9,000 in SE tax, minus $2,000 costs. Net $5,500-$7,000 benefit. Easy decision.
$200,000 profit: Saves $12,000+ in SE tax, minus $2,000-$3,000 costs. Net $9,000-$10,000 benefit. High priority.
What "Reasonable Salary" Actually Means
The IRS does not define a specific percentage, but it has audited and won cases where salaries were clearly too low. Here is what they look at.
IRS Considers These Factors
- ‣What similar employees get paid in your market
- ‣Your training, experience, and qualifications
- ‣Time and effort you put into the business
- ‣What your business pays other employees for similar work
- ‣How compensation compares to dividends paid
- ‣BLS wage data for your occupation code
Rule of Thumb by Business Type
State-Level Considerations
Federal tax savings are only part of the picture. Your state may add costs that change the math.
California charges S-Corps an $800 minimum franchise tax plus 1.5% of net income. On $100,000 profit that is $2,300 extra. Still usually worth it above $60k profit.
NYC imposes a general corporation tax on S-Corps that largely eliminates the federal benefit. If you operate in NYC, consult a local CPA before electing.
No state income tax on wages. This reduces the comparative benefit slightly since the state income savings are smaller.
Recognize the federal S-Corp election and pass income through to your personal return with no additional entity-level tax.
Always verify your state's rules with a local CPA before filing Form 2553. State law changes frequently and the above is a general guide only.
Frequently Asked Questions
How much does it cost to elect S-Corp status?
The IRS Form 2553 is free to file. You do not pay the IRS anything to make the S-Corp election. The real costs are ongoing: a payroll service runs $50-$150/month ($600-$1,800/year), and your CPA will charge $500-$2,000 more to prepare Form 1120-S versus a Schedule C. Total extra annual cost is typically $1,000-$3,000.
Can I just elect S-Corp status myself or do I need a CPA?
You can file Form 2553 yourself; it is a two-page form. However, running payroll correctly and filing Form 1120-S accurately is genuinely complex. Most business owners use a payroll service like Gusto or ADP and a CPA for the annual return. Getting payroll wrong creates IRS penalties. If you are saving $8,000+ per year, a $1,500 CPA fee is a good investment.
At what point does S-Corp stop making sense?
S-Corp stops making sense if your profit drops below roughly $40,000 per year, or if you plan to raise VC funding (S-Corps cannot have institutional investors or foreign shareholders), or if you operate in a state like California or NYC where entity-level taxes eat the savings. Also, if the business has multiple owners with different ownership percentages, LLCs allow flexible profit splits that S-Corps cannot.
Does the S-Corp election change my liability protection?
No. The S-Corp is a tax election, not a legal structure change. You remain an LLC (or corporation) from a legal standpoint. Your liability protection does not change. What changes is how the IRS taxes your income. You still need to maintain your LLC in good standing with your state, keep personal and business finances separate, and avoid commingling funds.