LLC vs S-Corp: Which One Saves You More on Taxes?

Choosing between an LLC and an S-Corp is one of the most consequential tax decisions a small business owner will make. Pick the right structure, and you can save thousands of dollars every year. Pick the wrong one, and you could overpay in taxes or drown in unnecessary paperwork.

Here's a plain-English breakdown of how each structure is taxed, when each makes sense, and how to know when it's time to switch.

How an LLC is Taxed (by Default)

By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. In both cases, all business profit "passes through" to the owners' personal tax returns.

The catch: every dollar of that profit is subject to self-employment tax (15.3%) on top of regular income tax. So if your LLC nets $100,000, you're paying roughly $15,300 in SE tax alone — before income tax even kicks in.

How an S-Corp is Taxed

An S-Corp also passes profits through to the owner's personal return, but with one critical difference: you pay yourself a reasonable salary, and the rest comes through as distributions.

• Your salary is subject to payroll taxes (the equivalent of SE tax)
• Your distributions are not subject to self-employment tax

This split is where the savings come from.

Real Numbers: LLC vs S-Corp Comparison

Let's say your business nets $120,000 in profit.

As an LLC (default taxation):

• Self-employment tax: $120,000 × 15.3% = $18,360
• (You can deduct half of SE tax, but it's still a big hit)

As an S-Corp:

• Reasonable salary: $70,000
• Payroll taxes on salary: $70,000 × 15.3% = $10,710
• Distributions: $50,000 (no SE tax)
• Total payroll tax: $10,710

Savings: $7,650 per year — just by changing your tax classification.

The Catch: S-Corp Costs More to Run

Those savings aren't pure profit. S-Corps come with additional costs and requirements:

• Payroll setup: You need to run actual payroll (typically $40–$100/month with a service)
• Separate tax return: Form 1120-S is required annually ($600–$1,500 in CPA fees)
• Reasonable salary requirement: The IRS requires you to pay yourself a salary appropriate for your role
• Stricter bookkeeping: You need clean separation between business and personal finances

Add it all up, and running an S-Corp typically costs $1,500–$3,000 more per year than a standard LLC.

When Should You Make the Switch?

The break-even point depends on your specific situation, but here's a general guideline:

Between $50,000 and $100,000 in profit, S-Corp savings start becoming meaningful. Above $100,000, the savings can be substantial — often $5,000 to $15,000+ per year.

When an LLC (Default Taxation) Makes Sense

• Your business earns under $40,000–$50,000 per year
• Your profit is inconsistent or unpredictable
• You want the simplest possible accounting and compliance
• You have multiple members with complex ownership structures

When S-Corp Election Makes Sense

• Your business consistently earns $50,000+ in profit
• You can pay yourself a reasonable salary from business income
• You're willing to run payroll and handle added compliance
• You want to maximize tax savings

How to Make the S-Corp Election

If you decide to elect S-Corp status, you file IRS Form 2553. The election must generally be made by March 15 to take effect for the current tax year (though late elections can sometimes be granted with a reasonable cause).

Your LLC's legal structure doesn't change — only its tax classification does. You still file your state LLC paperwork the same way. You just file a different federal tax return (Form 1120-S instead of Schedule C).

The Bottom Line

There's no universal "best" choice — it depends on your income level, business structure, and willingness to handle extra compliance. Most small business owners benefit from starting as a standard LLC and converting to S-Corp taxation once their profit consistently exceeds the break-even point.

A 30-minute conversation with a CPA can often identify the exact savings you'd see by switching — and whether it's worth it in your specific case.