S Corp vs LLC: Which Saves You More in Taxes?

Choosing the right business entity isn’t just a legal decision—it’s a tax strategy. Many small business owners default to an LLC because it’s simple and flexible. But as your income grows, that choice might cost you thousands more in self-employment taxes. Understanding whether an S Corporation election could reduce your tax burden is one of the most impactful decisions you can make.

Step-by-Step: How to Compare S Corp vs LLC

1. Start With Your Net Income

• Add up your expected profit (after expenses) for the year.

• If you’re making less than $50,000, sticking with an LLC is most often fine.

• If you’re making more than $75,000, it’s time to look seriously at an S Corp election.

2. Understand the Tax Differences

• LLC (Default)

  • Income taxed as self-employment income (15.3% on first ~$160K).

  • You pay both employer and employee portions of Social Security & Medicare.

    
    

• S Corp (Election)

  • You become an employee of the business.

  • You pay yourself a reasonable salary (subject to payroll taxes).

  • The remaining profit is distributed as a dividend, not subject to self-employment tax.

3. Estimate the Tax Savings

Here’s a simple example:

Scenario	LLC	S Corp
Net Income	$100,000	$100,000
Salary (S Corp only)	–	$50,000
SE Tax / Payroll Tax	$15,300	$7,650
Estimated Savings	–	$7,650

Note: You’ll pay extra for payroll setup and S Corp tax filings, so the savings must exceed those costs—usually by year two.

4. Make the S Corp Election

• File IRS Form 2553 by March 15 of the year you want the election to take effect.

• You can retroactively elect back to January 1 if you meet the deadline.

Pro Tips

• Keep detailed records of how you determine your salary. The IRS can audit this.

• Re-evaluate annually—what works now may not next year.

• You must be on payroll as an S Corp owner. Skipping this step can trigger penalties.

• Work with a tax advisor to model the breakeven point between S Corp benefits and added costs.

  
  

Common Pitfalls

Watch out for these mistakes when switching to an S Corp vs LLC:

• Filing Form 2553 late without relief

• Paying yourself too low a salary (red flag for audits)

• Not setting up payroll and issuing W-2s

• Forgetting state-level S Corp rules (some states don’t recognize them)

• Not budgeting for bookkeeping and extra tax filings

Final Checklist: Should You Elect S Corp Status?

•  My business profits are consistently above $75,000

•  I am ready to run payroll and file extra tax forms

•  I’ve reviewed my salary level with a tax pro

•  I’ve filed or plan to file IRS Form 2553 on time

•  I understand the compliance obligations for S Corps

  
  

Still unsure which entity structure is best for you? Our tax advising services can run the numbers, model your options, and file everything for you—so you stay focused on growing your business.