S-Corp vs. LLC: Which Structure Actually Saves You Money?
The S-Corp election can save a profitable business thousands in self-employment tax — but only above a certain income, and only if you run payroll correctly. Here's how to know if it's right for you.
It's about how you're taxed, not how you're formed
One of the most common points of confusion is treating an LLC and an S-Corp as two versions of the same thing. They aren't. An LLC is a legal structure created at the state level; an S-Corp is a federal tax election you can apply on top of it.
By default, a single-member LLC is taxed as a sole proprietorship — every dollar of net profit is subject to the 15.3% self-employment tax. Electing S-Corp status changes the math by letting you split your income into a reasonable salary and distributions.
Where the savings actually come from
Under an S-Corp, only the salary portion of your income is subject to payroll tax. The distributions you take beyond that salary are not hit with the 15.3% self-employment tax.
Say your business nets $120,000 and you pay yourself a reasonable salary of $70,000. The remaining $50,000 in distributions avoids self-employment tax — a potential savings of several thousand dollars a year. The more your profit exceeds a reasonable salary, the larger the benefit.
The catch: reasonable compensation and added complexity
The IRS requires S-Corp owners to pay themselves a reasonable salary for the work they do. Set it too low to dodge payroll tax and you invite scrutiny and penalties.
An S-Corp also brings real overhead: payroll filings, a separate 1120-S return, and more compliance. Those costs eat into the savings for lower-profit businesses. As a rule of thumb, the election tends to pay off once net profit consistently clears roughly $50,000 to $60,000.
How to actually decide
The right answer depends entirely on your real numbers — profit, a defensible salary, your state's taxes, and where your business is heading. There's no universal threshold that fits everyone.
We model both scenarios side by side so you can see the true after-tax difference before making the switch, and we handle the election and payroll setup if it makes sense for you.
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