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

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When you start a business, the default choice for most entrepreneurs is a single-member LLC. It's simple, flexible, and easy to set up. But here's what most business owners don't realize: the entity structure you choose has a direct impact on how much you pay in taxes — and in many cases, sticking with a default LLC is one of the most expensive decisions you'll make.

Let's break down the core difference.

With a standard LLC, all of your net profit is subject to self-employment tax — currently 15.3% on the first $168,600 of net earnings (2024), plus 2.9% on everything above that. If your business earns $200,000 in profit, you're looking at over $28,000 in self-employment taxes before you even get to income tax.

An S-Corporation changes that equation. With an S-Corp election, you split your income into two buckets: a reasonable salary (which is subject to payroll taxes) and a distribution (which is not). If your business earns $200,000 and you pay yourself a reasonable salary of $80,000, you only owe payroll taxes on the $80,000 — not the full $200,000. That difference alone can save $15,000 or more annually.

So why doesn't everyone do this? Because S-Corps come with additional complexity and cost. You'll need to run formal payroll, file additional tax forms, and pay for a more robust accounting setup. These costs typically run $3,000–$8,000 per year depending on the complexity of your operations.

The math is straightforward: if your net profit exceeds roughly $80,000–$100,000, the tax savings of an S-Corp election will almost always outweigh the additional administrative costs. Below that threshold, a standard LLC is typically the better choice.

There are nuances, of course. The IRS requires that S-Corp shareholders who work in the business pay themselves a "reasonable compensation" — a term that's intentionally vague but generally means what you'd pay someone else to do your job. Setting this salary too low is an audit trigger, so it needs to be defensible.

Other considerations include the number of shareholders (S-Corps are limited to 100, and cannot have foreign shareholders), state-level taxes (California, for example, imposes a minimum $800 franchise tax on S-Corps), and the nature of your income streams.

Bottom line: your entity structure isn't a set-it-and-forget-it decision. It should be revisited every year as your revenue grows. If you haven't had a formal entity structure review in the past 12 months — and your business is generating consistent profit — there's a reasonable chance you're leaving money on the table.

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