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.
| 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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