Most self-employed people start with an LLC — it is simple, cheap, and flexible. Once profit crosses roughly $60,000, the S-Corp election can save $3,000–$15,000 per year in self-employment tax. Here is exactly when to make the switch.
Run the numbers with a calculator
First, a key clarification: "LLC vs S-Corp" is not actually a fair comparison. An S-Corp is a federal tax election, not a business structure. You can form an LLC and then elect S-Corp tax status. Most "LLC vs S-Corp" questions are really asking: "Should my LLC be taxed as an S-Corp?" That is what we answer below.
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Self-employed people pay both halves of Social Security and Medicare — 15.3% on top of income tax. On $100,000 of profit, that is $14,130 in SE tax before you even think about federal and state income tax. The S-Corp election reduces this bill by only applying SE tax to your "reasonable salary" portion of the profit; everything else flows out as a distribution free of SE tax.
The IRS requires S-Corp owner-employees to pay themselves a "reasonable" W-2 salary — roughly what they would pay an outsider to do the same job. If your business profit is $200,000 and comparable salary for your work is $80,000, you pay:
• $80,000 as W-2 salary (SE tax applies) • $120,000 as distribution (no SE tax)
Savings: $120,000 × 15.3% = $18,360/year
Get reasonable compensation wrong (pay yourself $20k on $200k profit) and you invite an audit. The IRS has been cracking down on this. When in doubt, use salary benchmarking data and err slightly high.
Extra costs of S-Corp election (typical ranges):
• Payroll service: $500–$1,200/year • Additional accountant work (1120-S, payroll filings): $800–$2,000/year • Workers comp or unemployment insurance (varies by state)
Call it $2,000/year in added cost. SE tax savings depend on the gap between salary and total profit:
• $60k profit, $50k salary → $1,530 savings → NET LOSS • $80k profit, $55k salary → $3,825 savings → marginal net win • $120k profit, $75k salary → $6,885 savings → clear win • $200k profit, $90k salary → $16,830 savings → enormous win
Below $60k profit, stay an LLC. Above $80k, strongly consider the election. Above $120k, it is a slam dunk.
Both LLC and S-Corp are pass-through entities — profits flow to your personal return and are taxed at ordinary income rates. Both qualify for the 20% QBI deduction (with phase-outs). Both provide limited liability. Both can have multiple owners. The structural difference at the state level and the legal protections are largely identical.
S-Corp owners on payroll can contribute to Solo 401(k) plans based on W-2 wages, potentially allowing larger total retirement contributions than a pure LLC owner with the same total profit. This is a secondary benefit, but real: for high-income owners, the S-Corp plus Solo 401(k) combo can be a powerful tax shelter.
• Profit below $60k — admin costs exceed savings • Unstable income — forcing yourself to run W-2 payroll every month is a cash-flow headache • Plan to raise outside capital — LLC flexibility matters if investors are coming • Multi-state operations with complex state tax issues • Businesses that will be sold or rolled up — S-Corp election complicates some acquisition structures
Answer honestly — we will match your situation to LLC or S-Corporation.
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Yes — this is the most common setup for small businesses. File Form 2553 with the IRS (and any required state form) to elect S-Corp status while keeping the LLC legal structure.
Rough rule of thumb: $60,000 of net profit is the minimum; $80,000+ makes the math clearly favorable in most cases. Your accountant can run the exact numbers based on your state and situation.
The salary you would pay someone else to do your job. Use BLS data, recruiter benchmarks, and industry salary surveys to justify your number. Document it — the IRS has been aggressive on this.
Yes, but once revoked you cannot re-elect for 5 years without IRS permission. Be thoughtful before electing, especially if income is volatile.
No. Legal liability protection comes from the LLC or corporation legal structure, not the tax election. An LLC taxed as S-Corp has identical liability protection to an LLC taxed as partnership or sole proprietorship.
C-Corp is a separate tax entity subject to double taxation (corporate + dividend). Rarely optimal for small owner-operator businesses. It can make sense for high-growth startups seeking VC investment or retaining large earnings inside the business.
No — your total income tax is roughly the same. The savings are in self-employment/FICA tax, not income tax.
California imposes a 1.5% S-Corp tax plus the $800 minimum franchise tax. New York City has its own S-Corp tax. A handful of states require extra filings. Your accountant should walk through the state-level math before you elect.
Still on Schedule C? If you have not formed an entity yet, the first decision is sole proprietorship vs LLC — before worrying about the S-Corp election. See our LLC vs S-Corp vs Sole Proprietorship comparison for the full three-way breakdown.