LLC vs S-Corp: Which Business Structure Saves You the Most on Taxes?#

If you are self-employed or own a small business, you have probably heard that electing S-Corp status can save you thousands in taxes. That claim is broadly true — but the reality is more nuanced than most online articles suggest, and for some business owners, the S-Corp election is actually the wrong move.

This guide breaks down exactly how each structure works, the real math behind the tax savings, and the factors you should consider before making this decision.

How a Default LLC Is Taxed#

By default, a single-member LLC is treated as a disregarded entity for federal tax purposes. All business income flows through to your personal return on Schedule C. You pay ordinary income tax on the net profit and self-employment tax (15.3%) on the first $168,600 of net self-employment income (2024 threshold), plus the 2.9% Medicare tax on income above that threshold.

Self-employment tax is the big number here. It represents the combined employer and employee portions of Social Security and Medicare taxes that would normally be split with an employer. When you are self-employed, you pay both halves.

For a business generating $150,000 in net profit, the self-employment tax alone is approximately $21,200 — before income taxes.

How an S-Corp Is Taxed#

When you elect S-Corp status (which you can do as an LLC by filing Form 2553), the IRS treats your business as a separate taxing entity that passes income through to your personal return. The critical difference is that you become an employee of your own business and must pay yourself a reasonable salary.

Only your salary is subject to payroll taxes (the S-Corp equivalent of self-employment tax). Any remaining profit distributed to you as an owner is not subject to self-employment or payroll taxes.

Using the same $150,000 example: if you set a reasonable salary of $80,000, payroll taxes apply only to that $80,000 (approximately $12,240). The remaining $70,000 in distributions avoids payroll taxes entirely. That is approximately $8,960 in annual savings compared to the default LLC structure.

The “Reasonable Salary” Requirement#

This is where many business owners get into trouble. The IRS requires S-Corp owners who perform services for the business to receive a reasonable salary — meaning a salary that is comparable to what someone in a similar role, industry, and geographic area would be paid.

Setting your salary too low to maximize tax savings is one of the most common red flags the IRS looks for in S-Corp audits. If your business generates $200,000 and you pay yourself $30,000 in salary, the IRS will likely argue that is not reasonable for the work you perform, and they can reclassify your distributions as wages — with penalties and interest.

The general guidance is that your salary should represent at least 40-60% of the business’s net income, adjusted for industry norms and the nature of your work. A CPA experienced with S-Corps can help you determine the defensible range for your specific situation.

The Hidden Costs of S-Corp#

The tax savings from S-Corp status are real, but they are not free. S-Corp status introduces additional compliance costs and administrative requirements that reduce the net benefit:

Payroll processing. You must run regular payroll for yourself, including federal and state payroll tax withholding, quarterly Form 941 filings, annual W-2 preparation, and state unemployment insurance filings. Most businesses use a payroll service ($40–$100 per month) for this.

Additional tax returns. S-Corps file a separate business tax return (Form 1120-S) in addition to your personal return. This typically adds $1,000–$2,500 to your annual tax preparation costs.

State taxes and fees. Some states impose additional taxes or fees on S-Corps. California charges a minimum franchise tax of $800 per year. New York City imposes an unincorporated business tax that effectively eliminates much of the S-Corp benefit for city residents.

Reasonable salary documentation. You should maintain documentation supporting your salary level, including job descriptions, industry salary surveys, and records of the work you perform. This documentation protects you in case of an IRS audit.

When you add up the additional costs — payroll service ($600–$1,200/year), additional tax preparation ($1,000–$2,500/year), and possible state fees — the overhead of S-Corp status is typically $2,000–$4,000 per year.

When S-Corp Makes Sense#

The S-Corp election generally becomes worthwhile when your net self-employment income consistently exceeds $60,000–80,000 annually, the payroll tax savings exceed the additional compliance costs by a meaningful margin, you are willing to maintain the additional administrative requirements, and your state does not impose penalties that negate the federal savings.

When S-Corp Does Not Make Sense#

The S-Corp election may not be worth it if your business income is below $50,000–60,000 (the compliance costs may eat up most or all of the savings), your income is highly variable and unpredictable from year to year, you are a solopreneur who values simplicity and minimal administrative burden, or you operate in a state with unfavorable S-Corp taxation (California, New York City, Tennessee, Texas franchise tax, etc.).

The Calculation You Should Run#

The decision should not be based on general advice. It should be based on a specific calculation for your situation:

Estimate your net self-employment income for the year. Determine the reasonable salary range for your role. Calculate the payroll tax savings from S-Corp (roughly 15.3% of the difference between total income and salary, up to the Social Security wage base). Subtract the additional costs (payroll, tax prep, state fees). The remaining number is your true annual benefit.

If that number is over $5,000, the S-Corp election is likely worth the added complexity. If it is under $2,000, the default LLC is probably the simpler and better choice. If it is in between, it depends on your tolerance for administrative overhead.

Get Professional Guidance#

This is one decision where the cost of professional advice pays for itself immediately. A CPA who regularly handles both LLC and S-Corp clients can run the specific numbers for your situation, help you determine a defensible reasonable salary, handle the election filing and payroll setup, and identify any state-specific considerations that affect the analysis.

The accountants listed in our directory include many who specialize in small business entity structure decisions. Finding one who can walk you through this analysis is one of the highest-value conversations you can have as a business owner.