LLC vs S-Corp: Which Tax Structure Saves You More
An LLC can be taxed as a sole proprietorship, partnership, or S-Corp. The S-Corp election can save significant self-employment taxes—but isn't right for everyone. Here's how to decide.
Quick Comparison
| Feature | LLC (Default) | LLC (S-Corp) |
|---|---|---|
| Self-employment tax | All profits | Distributions only |
| Payroll required | No | Yes (reasonable salary) |
| Owners | Unlimited | Max 100 shareholders |
| Tax filing | Schedule C/K-1 | 1120-S + K-1 |
| Complexity | Simple | Moderate |
The Self-Employment Tax Issue
Default LLC Taxation
All profits subject to 15.3% self-employment tax (Social Security + Medicare). On $100K profit, that's $15,300 extra tax.
S-Corp Taxation
Only your salary is subject to employment tax. Distributions (profit above salary) are not. Same $100K with $60K salary: $9,180 employment tax. Savings: $6,120.
When S-Corp Makes Sense
- Consistent profits above ~$60K/year
- You can justify a "reasonable salary" below total profit
- You're willing to run payroll
- Solo founder or small team
When to Stay Default LLC
- Low or inconsistent profits
- Profits close to reasonable salary anyway
- You don't want payroll complexity
- Planning to raise VC (will convert to C-Corp)
S-Corp Requirements
- File Form 2553 within 2.5 months of formation or year-end
- Run actual payroll (withhold taxes, file forms)
- Pay "reasonable compensation" (IRS watches this)
- Max 100 shareholders, all US persons
- One class of stock
The Payroll Cost
Payroll services cost $30-100/month. Factor this into your savings calculation. Below ~$40K profit, S-Corp may not save money after costs.
We Help You Choose
Tax structure has lasting implications. We analyze your situation and recommend the right structure—not just what's popular.