The LLC vs S-Corp decision comes down to one thing: taxes. An S-Corp election can save thousands in self-employment tax — but only if your business earns enough to justify the extra complexity.
Quick answer: Stay as a default LLC if your profit is under $50K/year. Elect S-Corp taxation when profit consistently exceeds $50K–$60K/year. The sweet spot is $75K+ in profit where S-Corp savings clearly outweigh costs.
LLC vs S-Corp at a Glance
| Feature | LLC (Default Tax) | LLC with S-Corp Election |
|---|---|---|
| Legal structure | LLC | LLC (unchanged) |
| Liability protection | Yes | Yes |
| Self-employment tax | 15.3% on ALL profit | 15.3% only on salary |
| Payroll required | No | Yes — must run payroll |
| Accounting complexity | Simple | Moderate |
| Annual accounting cost | $0–$500 | $1,000–$3,000 |
| Reasonable salary requirement | No | Yes — IRS enforced |
| Quarterly tax filings | Schedule SE | Payroll tax filings |
| Best for | Businesses under $50K profit | Businesses over $50K profit |
Tax Savings: LLC vs S-Corp by Income
The S-Corp advantage comes from splitting your income into salary (subject to self-employment tax) and distributions (not subject to SE tax):
| Business Profit | LLC Tax (SE Tax) | S-Corp Tax (Salary + Distribution) | Annual Savings | Worth It? |
|---|---|---|---|---|
| $40,000 | $5,652 | $5,652 (all salary) | $0 | No |
| $50,000 | $7,065 | $5,652 + income tax on $10K | ~$1,400 | Maybe |
| $75,000 | $10,598 | $6,885 + income tax on $30K | ~$3,700 | Yes |
| $100,000 | $14,130 | $7,650 + income tax on $45K | ~$6,500 | Yes |
| $150,000 | $20,198 | $9,180 + income tax on $85K | ~$11,000 | Yes |
| $200,000 | $24,478 | $10,710 + income tax on $125K | ~$13,800 | Yes |
Assumes reasonable salary of ~55% of profit for lower incomes, decreasing percentage as profit grows. Actual savings depend on your specific reasonable salary.
How the S-Corp Tax Advantage Works
Default LLC (All Self-Employment Tax)
| Component | Amount (on $100K profit) |
|---|---|
| Net profit | $100,000 |
| Self-employment tax (15.3% × 92.35%) | $14,130 |
| Income tax (after SE deduction) | ~$12,500 |
| Total tax | ~$26,630 |
S-Corp Election (Split Salary + Distribution)
| Component | Amount (on $100K profit) |
|---|---|
| Reasonable salary | $55,000 |
| Payroll tax (15.3% on salary) | $8,415 |
| Distribution (not subject to SE tax) | $45,000 |
| Income tax (on full $100K) | ~$12,500 |
| Total tax | ~$20,915 |
| Savings | ~$5,715 |
What Is a “Reasonable Salary”?
The IRS requires S-Corp owners to pay themselves a reasonable salary before taking distributions. Setting it too low triggers audits.
| Business Type | Typical Reasonable Salary Range |
|---|---|
| Freelance writer/designer | $40,000–$70,000 |
| Consultant | $50,000–$100,000 |
| IT/Software | $60,000–$120,000 |
| Real estate agent | $40,000–$80,000 |
| Doctor/Dentist (private practice) | $150,000–$300,000 |
| Lawyer (solo practice) | $80,000–$150,000 |
| E-commerce business | $40,000–$70,000 |
How to determine your salary: Look at what similar employees earn in your area for the same work using BLS data, Glassdoor, or salary surveys. Document your research.
S-Corp Additional Costs
| Expense | Annual Cost |
|---|---|
| Payroll service (Gusto, ADP) | $500–$1,200 |
| CPA/tax preparation | $500–$2,000 |
| S-Corp tax return (Form 1120-S) | $500–$1,500 |
| Bookkeeping | $0–$3,000 |
| Total additional cost | $1,000–$3,000/year |
Your S-Corp savings must exceed these costs to be worthwhile. That’s why the $50K+ profit threshold matters.
S-Corp Requirements and Rules
| Requirement | Details |
|---|---|
| Maximum shareholders | 100 |
| Shareholder types | US citizens/residents only |
| Stock classes | One class only |
| Fiscal year | Calendar year (usually) |
| Reasonable salary | Must be paid before distributions |
| Payroll taxes | Must file quarterly (Form 941) |
| Annual return | Form 1120-S due March 15 |
| State requirements | Some states charge additional S-Corp fees |
How to Elect S-Corp Status
| Step | When | Form |
|---|---|---|
| 1. Form your LLC | Before S-Corp election | State filing |
| 2. Get an EIN | After LLC formation | IRS online |
| 3. File Form 2553 | Within 75 days of formation (or by March 15 for current year) | IRS Form 2553 |
| 4. Set up payroll | Before first pay period | Gusto, ADP, etc. |
| 5. Pay yourself regularly | Monthly or bi-weekly | Payroll service |
When to Stay as a Default LLC
| Situation | Why LLC Is Better |
|---|---|
| Profit under $50K | Savings don’t exceed S-Corp costs |
| Income is unpredictable | Hard to set a reasonable salary |
| Multiple business ventures | Simpler tax filing |
| Real estate (rental income) | Rental income isn’t subject to SE tax anyway |
| You plan to reinvest all profit | No distributions to save tax on |
| Startup phase / losing money | S-Corp adds complexity with no benefit |
Bottom Line
The LLC vs S-Corp decision is purely about tax savings. Keep your LLC’s default tax treatment until profits consistently exceed $50K–$60K/year. At that point, filing Form 2553 to elect S-Corp taxation can save you thousands in self-employment taxes annually — even while keeping your LLC legal structure unchanged.
For more, see how to start an LLC, self-employment tax guide, and quarterly tax payments.