S-Corp vs. LLC: Which Is Better for Your Taxes?

"Should I be an S-Corp or an LLC?" is one of the most common questions we get from small business owners — and one of the most misunderstood.

Here's the thing: S-Corp and LLC are not opposites. An LLC is a legal structure. S-Corp is a tax election. You can be both at the same time. But the way each is taxed is very different, and that difference can mean thousands of dollars per year.

Let's break it down clearly.

A Limited Liability Company (LLC) is a legal business structure that:

• Protects your personal assets from business debts and lawsuits
• Is relatively easy and inexpensive to form (state filing fee, usually $50–$500)
• Has flexible management and ownership rules
• Offers pass-through taxation by default

By default, a single-member LLC is taxed as a sole proprietorship (Schedule C). A multi-member LLC is taxed as a partnership (Form 1065). In both cases, all net profit flows to your personal return and is subject to self-employment tax (15.3% on the first $176,100 in 2026).

An S-Corporation is a tax election, not a separate legal entity. You can elect S-Corp status for:

• An LLC (by filing Form 2553)
• A corporation (by filing Form 2553)

When you elect S-Corp status, your business is still an LLC (or corporation) legally — but it's taxed differently.

Key difference: In an S-Corp, you split your income into two buckets:

1. W-2 salary — subject to payroll taxes (Social Security + Medicare)
2. Distributions — pass-through profit that is not subject to self-employment tax

This split is where the tax savings come from.

Let's use a concrete example. Assume your business has $120,000 in net profit and you're in the 22% federal income tax bracket.

Assume you pay yourself a reasonable salary of $60,000 and take $60,000 as a distribution.

Estimated annual savings: ~$9,200

The savings come entirely from not paying self-employment tax on the $60,000 distribution.

The S-Corp election isn't right for everyone. Here's when it typically makes sense:

Generally worth it when:

• Your net profit is consistently above $40,000–$50,000/year
• You can pay yourself a reasonable salary and still have meaningful distributions
• You're willing to run payroll (or hire someone to do it)
• You plan to stay in business for multiple years

Generally not worth it when:

• Net profit is below $40,000 — the payroll costs and added complexity eat the savings
• You're in the early stages of a business with inconsistent income
• You need maximum flexibility in how you take money out
• You're planning to sell the business soon (S-Corp can complicate asset sales)

The tax savings are real, but so are the additional costs and responsibilities:

1. Payroll You must run payroll for yourself. That means payroll software or a payroll service, quarterly payroll tax deposits, and year-end W-2 filing. Budget $500–$1,500/year for payroll administration.

2. Separate business tax return S-Corps file Form 1120-S, a separate business return due March 15. This is in addition to your personal return. Expect to pay more for tax preparation.

3. Reasonable compensation scrutiny The IRS watches S-Corps closely. If you pay yourself a very low salary to maximize distributions, you risk an audit and reclassification of distributions as wages — plus back taxes and penalties.

4. State-level taxes Some states don't recognize S-Corp status or impose additional taxes on S-Corps. California, for example, charges a 1.5% franchise tax on S-Corp net income (minimum $800/year).

The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" — what you'd pay someone else to do your job. There's no exact formula, but factors include:

• Your industry and role
• Hours worked per week
• Business revenue
• What comparable employees earn in your market

A good rule of thumb: your salary should be at least 40–60% of your total compensation (salary + distributions). We help our S-Corp clients determine a defensible reasonable salary each year.

If you decide an S-Corp election makes sense, here's how it works:

1. File Form 2553 with the IRS — this is the S-Corp election form
2. Deadline: For the election to apply to the current tax year, you must file by March 15 of that year (or within 75 days of forming your LLC)
3. Late election relief: If you missed the deadline, you may qualify for late election relief under Rev. Proc. 2013-30 — we can help with this
4. Set up payroll before your first paycheck as an S-Corp owner

The election is permanent until you revoke it or the IRS terminates it.

The S-Corp election is a legitimate and widely-used tax strategy — but it's not a magic solution. The savings are real, but so are the added responsibilities.

Before making the election, we recommend running the actual numbers for your specific situation: your net profit, your state's tax treatment of S-Corps, the cost of payroll and additional tax preparation, and your reasonable salary range.

Use our S-Corp Salary Calculator to get an instant side-by-side estimate — enter your net income and a reasonable salary and see exactly how much you could save in payroll taxes this year.

We do this analysis for clients regularly. Schedule a free consultation and we'll tell you exactly whether an S-Corp election makes financial sense for your business — and what the projected savings would be.

• S-Corp Election: Could It Save Your Business Thousands?
• How to Pay Yourself as an LLC Owner
• LLC Taxes Explained: A Plain-English Guide
• Why Tax Planning Should Happen Year-Round
• LLC to S-Corp Conversion
• Our Tax Preparation Services
• Contact Us