First, clear up the confusion
LLC and S-Corp are not the same kind of thing. An LLC is a legal entity registered with your state. An S-Corp is a tax election you can apply to an LLC (or a corporation). So the real question isn't "LLC or S-Corp" — it's "should my LLC be taxed as an S-Corp?"
Default LLC taxation
A single-member LLC is taxed as a sole proprietorship by default. A multi-member LLC is taxed as a partnership. In both cases, the owners pay:
- Federal income tax on net profit
- State income tax (where applicable)
- Self-employment tax of 15.3% on net profit (Social Security + Medicare)
That last one is where the pain lives.
What changes with an S-Corp election
When your LLC elects S-Corp taxation, you split your income into two pieces:
- A reasonable salary — subject to payroll taxes (your portion + the company's portion).
- Distributions of remaining profit — not subject to self-employment tax.
That second bucket is where the savings come from.
A simple example
Say your business nets $120,000.
- As an LLC (default): ~$16,950 in self-employment tax on the full $120,000, on top of income tax.
- As an S-Corp with a $60,000 reasonable salary: ~$9,180 in payroll taxes on the salary; the remaining $60,000 distribution avoids self-employment tax. Roughly $7,700 saved, before considering the added cost of running payroll.
When the math actually works
"Below about $40,000 in net profit, the cost of payroll, separate filings, and bookkeeping usually erases the savings. Above $50,000–$60,000, the S-Corp typically wins."
The S-Corp election is rarely worth it for very small businesses. It almost always is for established ones. The middle range needs a real projection — which is what we build for clients before recommending the switch.
What "reasonable salary" really means
The IRS requires that your S-Corp salary be reasonable for the work you do. Pay yourself $1 and take everything as distribution? That's the fastest way to trigger an audit and lose the entire benefit. We benchmark salaries against industry data so the number holds up.
The hidden costs people forget
- Payroll service or in-house payroll setup
- Separate Form 1120-S filing
- Possible state-level franchise or excise tax
- Quarterly payroll tax deposits
- Cleaner bookkeeping requirements
Premier Tax handles all of this in one package, which is why most of our S-Corp clients save money even after fees.
How we decide with you
We build a side-by-side projection — current entity vs. S-Corp election — using your actual numbers. If the projected savings comfortably exceed the added cost, we make the change. If not, we wait. Either way, you make the call with real numbers in front of you.
