LLC vs. S-Corp: Which One Will Save You More Money?
You've been running your business for a while now, and someone just told you that switching to an S-Corp could save you thousands in taxes. But you're already operating as an LLC, and you're wondering: Is this worth the hassle? Will I actually save money, or is this just more paperwork?
Here's the truth: The LLC vs. S-Corp decision isn't really a choice between two different business structures—it's a choice about how you want to be taxed. And yes, choosing the right tax structure could save you $5,000, $10,000, or even $20,000+ per year, depending on your situation.
But here's the catch: S-Corp status isn't automatically better for everyone. In fact, for some small business owners, it can actually cost more than it saves.
Let's cut through the confusion and figure out which option makes the most sense for your business with this comprehensive guide to LLC taxation vs S-Corp taxation.
First Things First: What's the Actual Difference?
Before we dive into tax savings, let's clear up a common misunderstanding.
An LLC (Limited Liability Company) is a legal business structure that protects your personal assets from business liabilities. It's what you file with your state to create your business entity.
An S-Corp (S-Corporation) is not a business structure—it's a tax election. It's a choice you make about how your business profits get taxed by the IRS.
Here's what matters: You can have an LLC that's taxed as an S-Corp. You get the legal protection of an LLC with the tax treatment of an S-Corp. This is actually the most common setup for small business owners who want S-Corp tax benefits.
So when people ask "LLC or S-Corp?" what they're really asking is: "Should I keep my default LLC tax treatment, or should I elect S-Corp taxation?"
How LLCs Are Taxed (The Default)
By default, if you're a single-member LLC, the IRS treats you like a sole proprietorship for tax purposes. If you have multiple members, you're treated as a partnership.
What this means for your taxes: All of your business profit is subject to self-employment tax, which is 15.3%. This breaks down as:
12.4% for Social Security (on the first $176,100 of earnings in 2025)
2.9% for Medicare (on all earnings)
Real Example: Sarah runs a freelance marketing business as an LLC. She netted $100,000 in profit last year.
Her self-employment tax: $14,130 (approximately 15.3% on $92,350 after the self-employment tax deduction) Plus her regular income tax: $12,000-$15,000 (depending on her bracket) Total tax bill: $26,000-$29,000
Every dollar of profit gets hit with that self-employment tax, and there's no way around it with default LLC taxation.
How S-Corps Are Taxed (The Game-Changer)
With S-Corp taxation, you split your income into two categories:
Salary (W-2 wages) - Subject to payroll taxes (15.3%)
Distributions (profits) - NOT subject to self-employment tax
This is where the tax savings happen and why many small business owners elect S-Corp status.
The Same Example, But as an S-Corp: Sarah still nets $100,000, but now she structures it differently:
Pays herself a $60,000 reasonable salary
Takes $40,000 as distributions
Her payroll tax on salary: $9,180 (15.3% of $60,000) Payroll tax on distributions: $0 Plus regular income tax on full $100,000: $12,000-$15,000 Total tax bill: $21,000-$24,000
Tax savings: $5,000-$5,000 per year compared to default LLC taxation.
The bigger your profit, the bigger the potential savings. For someone netting $150,000, the savings could be $10,000-$12,000 annually.
The Critical Catch: "Reasonable Compensation"
Before you rush to elect S-Corp status, here's what trips up most business owners: the IRS requires you to pay yourself a "reasonable salary" before taking any distributions.
You can't pay yourself $20,000 in salary and take $80,000 in distributions. The IRS will reclassify those distributions as wages, hit you with back taxes, penalties, and interest.
What's "Reasonable"? The IRS doesn't give you a specific number, but they consider:
What others in your industry and location earn for similar work
Your qualifications, training, and experience
How much time you spend working in the business
Your company's profitability
Industry Benchmarks for 2025: Based on market data, here are some typical reasonable salaries for S-Corp owners:
Freelance writers/designers: $45,000-$75,000
Consultants: $65,000-$110,000
Software developers: $85,000-$150,000
Real estate agents: $50,000-$90,000
Physical therapists/healthcare: $70,000-$120,000
The general rule of thumb: Your salary should be at least 40-60% of your business profit if you're actively working in the business full-time. Some tax professionals suggest even more conservative ratios of 60-70% to stay completely safe.
What Happens If You Get It Wrong: The IRS has been aggressively auditing S-Corps with suspiciously low salaries. Real cases:
An accountant in Arkansas paid himself $0 salary with $83,000 in distributions. The IRS reclassified it all as wages.
A CPA in Iowa paid himself $24,000 salary with $220,000 in distributions. The IRS treated $175,000 of his distributions as salary and imposed penalties.
These cases resulted in back taxes plus penalties and interest—far more expensive than just paying the right salary from the start. Proper tax planning is essential when electing S-Corp status.
When an LLC Makes More Sense
S-Corp taxation isn't always the answer. Here's when sticking with default LLC taxation is smarter:
1. You're Not Making Enough Profit Yet If your business nets less than $60,000-$80,000 annually, the tax savings from S-Corp status likely won't outweigh the additional costs and complexity.
Why? You still need to pay yourself a reasonable salary, and the payroll taxes on that salary eat up most of the potential savings. Plus, you're adding S-Corp compliance costs.
2. Your Income is Highly Variable If your income swings wildly month to month—making $15,000 one month and $2,000 the next—S-Corp payroll becomes a headache. You need to pay yourself that salary consistently, even during lean months.
3. You're Just Starting Out New businesses often have minimal profit (or losses) in the first year or two. There's no benefit to S-Corp taxation when there's no profit to distribute.
Start as an LLC, get your business established, and elect S-Corp status later when it makes financial sense.
4. You Want Maximum Simplicity LLCs are simpler. There's no payroll to run, no W-2s to issue, no quarterly payroll tax filings. If simplicity is worth more to you than tax savings, stay with default LLC taxation.
When S-Corp Taxation Makes Sense
Consider electing S-Corp status if:
1. You're Netting $80,000+ Consistently This is the general threshold where S-Corp tax savings start to significantly outweigh the additional costs and complexity.
2. You Have Steady, Predictable Income You can afford to pay yourself a regular salary without cash flow stress.
3. You're Willing to Handle Additional Requirements S-Corps require:
Running payroll (even if you're the only employee)
Filing quarterly payroll tax returns (Form 941)
Issuing yourself a W-2 annually
Filing a separate business tax return (Form 1120-S)
Potentially paying for payroll software or services
4. The Math Works Out Quick calculation: Take your expected annual profit, multiply by 15.3%, then subtract the additional S-Corp costs (typically $1,500-$3,000 for payroll and tax prep).
If the result is significantly positive (at least $4,000-$5,000), S-Corp status is worth considering.
The Hidden Costs of S-Corp Status
Don't forget to factor in these expenses when calculating your potential savings:
Payroll Processing:
DIY payroll software: $40-$150/month ($480-$1,800/year)
Accountant-managed payroll: $100-$300/month ($1,200-$3,600/year)
Tax Preparation: S-Corp tax returns are more complex than Schedule C (sole proprietor) returns. Expect to pay $800-$2,000 more annually for tax preparation.
State Requirements: Some states charge additional fees or taxes for S-Corps. California, for example, has a minimum $800 franchise tax.
Your Time: Running payroll, even for just yourself, takes time. Budget at least 2-4 hours monthly for payroll-related tasks if you're handling it yourself.
Total additional costs: $1,800-$7,000+ annually
Make sure your tax savings exceed these costs by a meaningful margin.
Can You Switch Between LLC and S-Corp?
Yes! This is one of the most flexible parts of the decision.
From LLC to S-Corp: You can elect S-Corp taxation for your LLC by filing Form 2553 with the IRS. The deadline is:
March 15 of the year you want the election to take effect, or
Within 2 months and 15 days of forming your LLC
Late elections are sometimes possible with IRS relief, but it's better to file on time.
From S-Corp Back to LLC: You can revoke your S-Corp election, but you typically can't re-elect for 5 years. This makes it harder to go backwards, so think carefully before electing S-Corp status.
LLC Taxed as S-Corp: The Best of Both Worlds?
For many small business owners, the ideal setup is:
Legal structure: LLC (for simplicity and flexibility)
Tax election: S-Corp (for tax savings)
This gives you:
The liability protection of an LLC
Simpler ownership and management structure
The tax benefits of an S-Corp
Fewer restrictions than a traditional corporation
You keep your LLC with your state, but check the box to be taxed as an S-Corp with the IRS. It's the most popular structure for established small businesses and 1099 contractors earning solid profits.
Real-World Decision Framework
Use this framework to decide:
Stick with default LLC taxation if:
Annual profit under $60,000
Highly variable income month to month
In your first 1-2 years of business
You value simplicity over tax savings
Additional costs would eat up most savings
Elect S-Corp taxation if:
Annual profit consistently $80,000+
Steady, predictable income
You can handle the administrative requirements
Tax savings will be $5,000+ after all costs
You're committed to paying yourself a reasonable salary
Not sure? Start with LLC taxation and revisit the decision annually as your business grows.
The Bottom Line
Here's what you need to remember:
An LLC is a legal structure. An S-Corp is a tax election. You can have both.
For most small business owners and 1099 contractors:
Below $60,000-$80,000 profit: Default LLC taxation makes more sense
Above $80,000-$100,000 profit: S-Corp taxation usually saves significant money
The sweet spot: LLC legal structure with S-Corp tax election
The decision isn't permanent. You can start as an LLC and elect S-Corp status later when the numbers make sense.
Most importantly: The tax savings are real, but only if you do it right. Paying yourself too little salary or failing to meet S-Corp requirements can cost you far more than you save.
Your Next Steps
If you're considering S-Corp taxation:
This Week:
Calculate your expected annual profit
Research reasonable salaries for your role and industry
Estimate your potential tax savings vs. additional costs
This Month: Consult with a tax professional who specializes in S-Corps, review your current bookkeeping system and decide if payroll software or a payroll service makes sense.
Before You Elect: Make sure you have at least 3-6 months of financial data showing consistent profit, confirm you can afford to pay yourself a reasonable salary every pay period and understand all the compliance requirements.
Ready to Figure Out Your Best Option?
Choosing between LLC and S-Corp taxation isn't a one-size-fits-all decision. Your business is unique, and your tax strategy should be too.
At BrightTrail Accounting, we specialize in helping small business owners and contractors navigate exactly these types of decisions. We provide comprehensive tax planning services and business accounting to help you minimize your tax liability.
We'll look at your specific numbers, run the calculations, and give you a clear recommendation based on your actual situation—not generic advice.
You deserve more than guesswork when it comes to taxes. You deserve a clear path forward.
Let's talk. Schedule a free 30-minute consultation to discuss whether S-Corp taxation makes sense for your business. No pressure, just clarity.
Contact BrightTrail Accounting
Email: tyler@brighttrailaccounting.com
Call/Text: (414) 485-5588
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Disclaimer: This article provides general tax information for educational purposes. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances. S-Corp election has specific IRS deadlines and requirements that must be met.
