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

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One of the most common questions we field from growing business owners is deceptively simple: should I be an LLC or an S-Corp? The answer depends entirely on your income level, business structure, and long-term goals — but the tax implications can be significant.

The LLC Default

When you form an LLC and don't make any tax elections, the IRS treats it as a pass-through entity. If you're a single-member LLC, your business income flows directly to your personal return and is subject to both income tax and self-employment tax (15.3% on the first $168,600 in 2024).

For lower-revenue businesses, this is perfectly fine. The simplicity of a single-member LLC is a feature, not a bug.

How the S-Corp Changes the Math

When you elect S-Corp status, you split your business income into two buckets: a reasonable salary (subject to payroll taxes) and a distribution (not subject to self-employment tax). This is where the savings come from.

Example: A business owner generating $200,000 in net profit.

• As an LLC: Roughly $28,000 in self-employment taxes on the full amount
• As an S-Corp with a $80,000 salary: Payroll taxes only on the salary (~$12,000), saving approximately $16,000 annually

The Break-Even Point

The S-Corp election comes with real costs: payroll processing, additional tax filings, and more complex compliance. Most tax professionals agree the election starts making financial sense around $50,000–$80,000 in net business income, with the savings accelerating significantly above $100,000.

The Reasonable Salary Requirement

The IRS requires S-Corp owners to pay themselves a "reasonable" salary for services rendered — you can't set it to $1 and take everything as distributions. The IRS scrutinizes this, and getting it wrong creates back taxes, penalties, and interest.

What This Means for You

Entity structure optimization is one of the highest-leverage tax planning moves available to small business owners. But the right answer is specific to your situation. If your net business income is above $75,000 and growing, it's worth a conversation with a qualified tax professional to run the numbers.

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