S Corp vs LLC: Which One Actually Saves You Money?

"S corp vs LLC" compares two different kinds of thing, which is why it never quite resolves. An LLC is a legal entity you form with a state; an S corporation is a federal tax election you make with the IRS — and an LLC can make that election while staying an LLC.

So the real question is not LLC or S corp. It is: should my LLC keep its default tax treatment, or elect to be taxed as an S corporation? That decision is driven almost entirely by self-employment tax, and the math typically starts to work somewhere in the mid five figures of annual profit.

The short answer

The election is usually a net loser below about $50,000 of net profit, a genuine judgment call from there to roughly $100,000, and worth modeling properly above that. Those are not legal thresholds — they are where the savings tend to overtake the added cost.

Why does everyone get this backwards?

An LLC is created under state law. State law says nothing about how the IRS taxes it, and by default the IRS ignores the LLC wrapper entirely: a single-member LLC is taxed as a sole proprietorship, a multi-member LLC as a partnership.

"S corporation" appears on no state formation document anywhere. It is a classification under subchapter S of the tax code, claimed by filing Form 2553. An LLC can file that form on its own, and the IRS treats it as electing corporate classification and S status in one step. A corporation can file it too — same election, different starting point, since a corporation's default is C corp treatment.

Two consequences people miss:

• You do not give up your LLC. Your operating agreement, your registered agent, your state filings, your liability shield — all unchanged. Only the tax return changes.
• The election is reversible, but not casually. Revoking it generally locks you out of re-electing for five years without IRS consent.

What actually changes: self-employment tax

Under default treatment, the LLC's net profit lands on the owner's 1040 and carries self-employment tax: 15.3% total, made up of 12.4% Social Security up to an annual wage base and 2.9% Medicare with no cap. It applies to 92.35% of net earnings, and half of the resulting tax is deductible against income.

The critical point: SE tax is charged on profit, not on what you withdraw. Leaving money in the business account changes nothing.

Elect S corp treatment and you become an employee of your own company. You run payroll, pay yourself a salary, and that salary carries FICA at the same combined 15.3% — half withheld from you, half paid by the company. Whatever profit is left after salary is distributed to you, and distributions are not subject to self-employment or FICA tax.

That gap is the entire benefit. Nothing else about the election reduces tax. Income tax on the profit is unchanged; all of it still shows up on your personal return.

A worked example at $120,000 of profit

Single-member LLC, $120,000 of net profit, owner takes a $70,000 salary after electing.

The payroll-tax difference is $6,245. That is the number most articles stop at, and it is misleading on its own.

The qualified business income deduction claws a chunk of it back. That deduction is 20% of pass-through business income — and W-2 wages you pay yourself are not pass-through income. Paying yourself $70,000 in salary removes $70,000 from the base the deduction is calculated on. Run the full comparison and taxable income is about $16,500 higher under the S corp; at a 22% marginal rate that is roughly $3,600 more income tax, leaving about $2,600 of real saving.

Subtract $1,200–3,000 of payroll service and 1120-S preparation and this particular example lands somewhere between "barely worth it" and "not worth it" — on numbers that most online calculators would call an easy win.

Two things move that conclusion. Above the taxable income levels where the deduction's wage limitations apply, W-2 wages can increase the deduction rather than shrink it, which flips the adjustment's sign. And the lower your defensible salary, the better both effects get — which is precisely why the IRS pays attention to salaries.

Where does the election start to pay?

Two mechanics shape this curve. Once your salary passes the Social Security wage base, additional distributions only avoid the 2.9% Medicare portion instead of the full 15.3% — the benefit keeps growing with profit, but far more slowly. And the added cost of running an S corp is close to fixed, so it hurts most at the bottom of the table and rounds to nothing at the top.

What counts as a reasonable salary?

The law requires an S corp owner who works in the business to be paid reasonable compensation for that work. Underpay yourself and the IRS can reclassify distributions as wages, then assess back payroll tax, penalties, and interest.

There is no percentage rule, despite how often you'll see "60/40" quoted. What actually gets weighed is your duties and hours, your experience and qualifications, what comparable businesses pay someone to do that job, and the size of your distributions relative to your salary.

The practical defense is documentation: write down the market rate for the role you actually perform, cite where you got it, and revisit it yearly. A salary of zero paired with six figures of distributions is the pattern that draws scrutiny.

What it costs to run

• Payroll. A payroll service typically runs a few hundred to about $1,500 a year, plus state employer registration, quarterly filings, unemployment insurance, and W-2s.
• A second return. Form 1120-S is a business return with its own March deadline and its own preparation fee — usually well above what a Schedule C adds. See what CPAs charge for a small business return for current ranges.
• Tighter books. You can no longer treat the business account as your own. Owner draws, salary, and distributions have to be recorded distinctly, which is where a bookkeeper and a CPA divide the work.
• Owner health insurance. Premiums for a more-than-2% shareholder have to run through payroll and appear on the W-2. Easy to miss, annoying to fix after year end.
• Retirement contributions. In an S corp, employer retirement contributions are calculated off W-2 wages. A very low salary shrinks how much you can put away — a real cost that rarely appears in the payroll-tax comparison.

Who can't elect S corp status?

The eligibility rules are strict and they disqualify more businesses than people expect:

• 100 shareholders maximum. Family members can generally be counted as one.
• US individuals only. Shareholders must be individuals who are US citizens or resident aliens, plus certain estates and trusts. Partnerships, corporations, and nonresident aliens are out — a single foreign co-owner kills the election.
• One class of stock. Differences in voting rights are fine; differences in economic rights are not. For an LLC this is the sharp edge: special allocations or preferred returns in your operating agreement can break the requirement, so the agreement usually needs review before you file.

If you intend to raise venture capital, an S corp is generally the wrong shape. Preferred stock violates the one-class rule and most funds are partnerships, which cannot be shareholders.

Timing matters too. The election is generally due within roughly the first two and a half months of the tax year it should apply to, or any time in the prior year. The IRS does have a standard relief procedure for late elections, but relying on it is not a plan.

Does your state go along with it?

Federal S status does not automatically carry through to state tax, and the exceptions are expensive.

California taxes S corporation net income at the entity level (1.5% at the time of writing, subject to an annual minimum franchise tax) — a cost a default LLC does not pay in that form, though California LLCs owe their own annual tax and gross-receipts fee. New York City does not recognize the federal S election for its general corporation tax at all, so a profitable S corp there is taxed as a corporation by the city regardless. A handful of other states impose their own entity-level taxes or require a separate state election.

Pushing the other way, most states now offer a pass-through entity tax election as a workaround to the federal cap on state and local tax deductions. The rules differ by state and can change the answer in either direction, which is a large part of why this decision is worth a conversation with someone who files in your state.

Of the 13,986 US firms in our directory, 582 list business formation and entity selection as a service and 2,849 list tax planning — both counted from what firms publish on their own websites.

Questions to ask

Bring these to whoever prepares your return, ideally before the filing deadline for the election rather than after:

1. At my actual profit, what does the election save after everything? Ask for the number net of payroll costs, the extra return, and the QBI effect — not the payroll-tax difference alone.
2. What salary would you defend, and on what evidence? If the answer is a flat percentage with no market data behind it, keep asking.
3. What does my state do with an S election? Including any entity-level tax and whether a separate state election is required.
4. Does my operating agreement survive the one-class-of-stock rule? Multi-member LLCs with any allocation that isn't strictly pro rata need this checked first.
5. Who runs payroll, and what happens if a filing is missed? Payroll penalties are the most common way a small S corp gives back its savings.
6. What does unwinding this look like? Given the five-year lockout on re-electing, it's worth knowing before you start.

If you want someone local to run the numbers on your actual profit, browse tax CPAs near you or small business accountants near you. Every profile links straight to the firm's own website.

This is general information, not advice about your situation — the numbers above are illustrative, tax rules and state treatment change, and the right answer depends on facts a page can't see. Confirm it with a CPA or enrolled agent before you file anything.