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

If you’ve been filing as a sole proprietor or single-member LLC, at some point your accountant will (or should) ask: “Have you considered electing S-Corp status?” It’s not the right move for everyone — but when it works, it can save thousands in taxes annually. Here’s how to think about it.

The Self-Employment Tax Problem

When you’re a sole proprietor or single-member LLC, every dollar of your net business profit is subject to self-employment tax — currently 15.3% on top of your regular income tax. So if your business clears $100K in net profit, you owe roughly $15,300 in self-employment tax before you even calculate income tax.

How an S-Corp Election Changes the Math

When you elect S-Corp status (an LLC can do this — you don’t need to dissolve and reform), the IRS lets you split your income into two categories:

• A reasonable salary — subject to payroll taxes (the equivalent of self-employment tax)
• Distributions — NOT subject to self-employment/payroll tax

If your business clears $100K and a reasonable salary for your role is $60K, you save self-employment tax on the remaining $40K — that’s about $6,120 in annual tax savings.

“Reasonable Salary” — The Catch

The IRS requires S-Corp owner-employees to pay themselves a “reasonable” salary — meaning what someone in your role at your level would earn at a similar company. You can’t pay yourself $1 in salary and take everything else as distributions; that’s an audit invitation. The salary must be defensible based on industry standards, your role, hours worked, and revenue.

When the S-Corp Doesn’t Make Sense

S-Corp status comes with real costs: payroll setup, separate business returns (Form 1120-S), state filing fees in some states (California’s $800 minimum franchise tax, for example), and increased compliance complexity. As a rough rule:

• Below $50K net profit: usually not worth it
• $50K–$80K: maybe — depends on state, salary, complexity tolerance
• $80K+: usually saves money even after compliance costs

When to Consider Switching

If your business profit is consistently above $80K, you’ve never reviewed your structure, and you’re paying full self-employment tax on everything — talk to a CPA. The S-Corp election can usually be made retroactively to the start of the tax year (Form 2553) but the deadline is March 15 for current-year status, so timing matters.