The right business structure can save thousands in self-employment taxes each year — but only if the numbers work out. Here's everything you need to decide.
| Feature | LLC (Sole Proprietor / SMLLC) | S-Corporation |
|---|---|---|
| SE Tax Applies To | All net business profit | Salary only (not distributions) |
| Payroll Required | No — draw from business at will | Yes — must pay reasonable W-2 salary |
| Annual Admin Cost | Low (~$0–$500/yr extra) | Higher (+$1,500–$3,000/yr) |
| Tax Filings | Schedule C on Form 1040 | Separate Form 1120-S + Schedule K-1 |
| State Fees | LLC annual fee (varies by state) | LLC fee + possible S-Corp franchise tax |
| QBI Deduction | Available (up to 20% of QBI) | Available (up to 20% of QBI) |
| Best For | Net profit under ~$50K | Consistent net profit $50K+ |
A single-member LLC (SMLLC) is treated as a "disregarded entity" by default — meaning the IRS considers it the same as a sole proprietorship for tax purposes. Your business profit flows to Schedule C on your personal return.
Self-employment tax of 15.3% applies to 92.35% of your net profit (the 92.35% adjustment accounts for the employer-equivalent deduction embedded in the rate). Here's the formula:
Example — $80,000 net profit:
An S-Corp doesn't eliminate SE tax — it shifts it. Instead of paying SE tax on all your profit, you:
Example — $80,000 profit, $50,000 salary:
Gross SE tax savings: $3,654/year — before subtracting S-Corp admin costs of roughly $2,000/yr, netting approximately $1,654 in real savings at this income level.
At $120,000 profit with a $70,000 salary, the same calculation yields about $7,650 in savings before admin costs — a much stronger case for the S-Corp.
This is the most important — and most scrutinized — aspect of S-Corp taxation. The IRS requires shareholder-employees to pay themselves compensation that reflects what the market would pay for the same services. Setting an artificially low salary to maximize tax-free distributions is one of the most common IRS audit triggers for small businesses.
The IRS considers factors including:
| Industry / Role | Typical Range | Median |
|---|---|---|
| Technology / Software | $75,000 – $130,000 | $100,000 |
| Medical / Dental | $100,000 – $200,000 | $145,000 |
| Legal | $80,000 – $150,000 | $110,000 |
| Consulting | $60,000 – $120,000 | $85,000 |
| General Professional | $45,000 – $85,000 | $62,000 |
| Creative / Design | $40,000 – $75,000 | $56,000 |
| Real Estate | $40,000 – $80,000 | $58,000 |
Source: Based on BLS Occupational Employment Statistics and IRS guidance. These are general benchmarks — reasonable salary varies by region, specialization, and business revenue. Document your salary rationale in writing.
The S-Corp tax savings must be weighed against real compliance costs. Here's what to budget:
Payroll software or service (Gusto, ADP, QuickBooks Payroll). Includes W-2 generation, tax deposits, and quarterly Form 941 filings.
S-Corps must file Form 1120-S separately from your personal return. Most CPAs charge $500–$1,500 more than a simple Schedule C return.
Some states charge S-Corp franchise taxes or additional fees. California imposes an $800 minimum franchise tax plus a 1.5% S-Corp fee on income over $1M.
Separating salary vs. distribution requires cleaner bookkeeping. If you're self-managing books, add time cost; if outsourcing, expect additional charges.
The crossover point depends on your specific salary, overhead costs, and state. As a general framework:
| Annual Net Profit | Estimated SE Tax Savings* | Est. Admin Cost | Net Benefit | S-Corp Worth It? |
|---|---|---|---|---|
| $30,000 | ~$1,500 | ~$2,000 | -$500 | No |
| $50,000 | ~$2,900 | ~$2,000 | ~$900 | Borderline |
| $75,000 | ~$5,200 | ~$2,200 | ~$3,000 | Yes |
| $100,000 | ~$7,650 | ~$2,500 | ~$5,150 | Yes |
| $150,000 | ~$10,200 | ~$2,500 | ~$7,700 | Yes |
*Savings assume reasonable salary equals ~60–65% of profit. Actual numbers depend heavily on your specific salary election and state. Always model with a CPA.
Electing S-Corp taxation is a two-step process for LLCs: first form or confirm your LLC under state law, then file Form 2553 with the IRS.
Your LLC must be registered with your state and have filed all required annual reports and fees. S-Corps can have no more than 100 shareholders and only one class of stock.
Deadline: No later than 2 months and 15 days into the tax year you want the election effective. For a calendar year, that's March 15. For 2027 effectiveness, file by March 15, 2027. Late elections are sometimes accepted — the IRS provides relief for reasonable cause.
Immediately set up payroll through a provider (Gusto, QuickBooks Payroll, etc.). Determine your reasonable salary with your CPA before the first payroll run. Pay yourself at regular intervals — typically monthly or biweekly.
S-Corps must file a separate informational tax return (Form 1120-S) by March 15 each year. Your share of income, deductions, and credits flows to you via Schedule K-1, which you attach to your personal Form 1040.
Federal SE tax savings are only part of the picture. Your state may add its own wrinkles:
Assume: single filer, $100,000 net business profit, $70,000 reasonable S-Corp salary, 22% federal income tax bracket, no state income tax.
| Line Item | LLC (Sole Prop) | S-Corp |
|---|---|---|
| Net Business Profit | $100,000 | $100,000 |
| W-2 Salary | N/A | $70,000 |
| S-Corp Distribution | N/A | $30,000 |
| SE Tax / FICA | $14,130 (on $100K) | $10,710 (on $70K salary) |
| SE Tax Deduction | $7,065 | $5,355 (employer FICA share) |
| Taxable Income (approx) | $83,935 | $94,645 |
| Federal Income Tax (est.) | ~$14,600 | ~$16,800 |
| S-Corp Admin Costs | $0 | ~$2,500 |
| Total Tax + Admin | ~$28,730 | ~$30,010 |
| Net S-Corp Benefit | Borderline at $100K in this scenario | |
Enter your profit and estimated salary to see your exact SE tax savings and whether an S-Corp makes sense for your situation.
Use the LLC vs S-Corp Calculator