Business Structure
LLC vs. S-Corp: Which Saves You More in Taxes?
The LLC-versus-S-Corp question comes up in almost every new-client meeting. The honest answer is: it depends on your profit. Here's how to think about it.
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01What an LLC Actually Is
An LLC is a legal structure, not a tax status. By default a single-member LLC is taxed as a sole proprietorship, which means all profit is subject to self-employment tax. The liability protection is real; the tax savings, by default, are not.
02What Changes With an S-Corp Election
An LLC can elect to be taxed as an S-Corp. You then pay yourself a reasonable salary (subject to payroll tax) and take remaining profit as distributions, which are not subject to self-employment tax. That split is where the savings come from.
03The Break-Even Point
The extra payroll filings and bookkeeping an S-Corp requires cost money, so the election only pays off above a certain profit level, often around the point where net profit clears roughly $40,000 to $50,000, though it varies. See the IRS S-Corp overview for the rules.
04The Reasonable Salary Rule
The IRS requires S-Corp owners to pay themselves a reasonable salary before taking distributions. Setting it too low to dodge payroll tax is a common audit trigger.
05How do you decide between an LLC and an S-Corp?
Run the numbers on your actual profit, factor in the added compliance cost, and revisit the decision yearly as income grows. This is exactly the kind of calculation worth doing with a professional.
Common questions
Does forming an LLC lower my taxes?
Not by itself. An LLC is a legal structure, and a single-member LLC is taxed as a sole proprietorship by default, with all profit subject to self-employment tax. The liability protection is real; the tax saving, by default, is not.
Where does the S-Corp saving come from?
After the election you pay yourself a reasonable salary, which carries payroll tax, and take the remaining profit as distributions, which do not carry self-employment tax. The split between the two is the saving.
What is the reasonable salary rule?
S-Corp owners must pay themselves a reasonable salary before taking distributions. Setting it too low to avoid payroll tax is a common audit trigger, so the salary has to be defensible for the work you do.
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Schedule a ConsultationThis article is general information, not individualized tax, legal, or financial advice. Every situation is different. Reach out and we'll look at yours directly.