LLC vs. S-Corp Tax Election
An LLC by default is taxed as a sole prop or partnership. Electing S-Corp status splits owner income into salary (FICA-taxed) and distributions (not FICA-taxed), saving 15.3% on the distribution portion. The breakeven is usually $50,000-$75,000 of net profit.
The short answer
Stay a plain LLC below roughly $60,000 to $80,000 of net profit. Elect S-corp above it.
These are not alternatives in the way the phrasing suggests. An LLC is a legal entity; an S-corporation is a tax election that an LLC can make. You are not choosing between them so much as deciding whether to add the election.
By itself an LLC changes nothing about your tax. A single-member LLC is disregarded and the income lands on Schedule C exactly as it would without one. What the S-corp election does is let you split income between a reasonable salary, which carries payroll tax, and distributions, which do not.
The threshold exists because the election has fixed costs — payroll processing, a separate business return, higher accounting fees — that have to be earned back before the saving is real.
Where the threshold comes from
$100,000 of net business profit, comparing self-employment tax against an S-corp paying a $60,000 salary.
| LLC (no election) | $14,130 | Self-employment tax on 92.35% of profit — 12.4% Social Security plus 2.9% Medicare. |
|---|---|---|
| S-corp election | $9,180 | Payroll tax on the $60,000 salary only. The $40,000 of distributions carries none. |
A gross saving of $4,950, or about $2,950 after roughly $2,000 of payroll and filing costs. At $50,000 of profit the same arithmetic leaves almost nothing, which is where the threshold comes from.
Where people go wrong
- Forming an LLC expecting a tax benefit. The election is what changes the arithmetic, not the entity.
- Setting an artificially low salary. The IRS scrutinises this and the penalty is back payroll tax plus interest.
- Electing S-corp too early, so the fixed costs exceed the saving.
- Forgetting that S-corp status brings payroll filings, a separate return, and deadlines that do not exist for a sole proprietor.
Common questions
Can an LLC be taxed as an S-corp?
Yes — that is the usual arrangement. You keep the LLC as your legal entity and file Form 2553 to elect S-corporation tax treatment. You do not need to form a corporation.
What counts as a reasonable salary?
What you would have to pay someone else to do your job, judged against industry data for your role, region and hours. There is no safe percentage, though paying yourself less than half of profit invites questions. This is worth an accountant rather than a rule of thumb.
Does an S-corp election reduce income tax too?
No. It reduces employment tax by exempting distributions from it. Your income tax is broadly unchanged, and the QBI deduction interacts with the salary split in ways that can erode part of the saving at higher incomes.
| LLC | S-Corp Tax Election | |
|---|---|---|
| Self-employment tax | 15.3% on ALL net income | 15.3% on salary only |
| Payroll requirement | None | Required (W-2 to yourself) |
| Tax filing | Schedule C on personal 1040 | Form 1120-S + K-1 + personal 1040 |
| Annual cost | $0-$200 (state fees) | $800-$2,500 (payroll + tax prep) |
| Reasonable salary | Not required | Required (IRS audits this) |
| State franchise tax | Often $0 | Varies — CA $800/yr minimum |
| QBI deduction | 20% on net income (with limits) | 20% on K-1 income (with limits) |
| Best for | Net profit under $50K, side hustles | Net profit $75K+, established business |
Choose LLC if
- Your business nets under $50K/year.
- You want zero administrative overhead.
- You may shut down or pivot the business soon.
- You live in a state with high S-Corp franchise taxes.
Choose S-Corp Tax Election if
- Your business nets $75K+ consistently.
- You can afford $1,500-$2,500/year for payroll + tax prep.
- You plan to keep the business 3+ years.
- You want the audit deterrent of a "real" corporate structure.
Run the numbers yourself
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