Choosing between an LLC and an S-Corp can feel like comparing two reliable options, but the tax results differ significantly based on your profits and involvement in the business. For many small business owners, tax season often brings surprises: hefty self-employment taxes or payroll tax calculations that affect your net take-home. The business structure—LLC or S Corporation—you select directly impacts your total tax burden, compliance requirements, and the long-term money you keep versus how much you pay the IRS. These decisions can result in real, recurring tax savings when properly optimized
In this guide, we'll break down how these business entities differ when it comes to income tax, self employment tax, and payroll requirements.
Both LLCs and S Corporations can help you keep more money—but the winner depends on your business income and goals.
LLC Quick Summary:
Pros: Simple setup, flexible tax status, no payroll requirements
Cons: Self-employment tax applies to all net profits
Best for: New businesses or those with lower annual profits (under $60K-$80K/year)
S Corp Quick Summary:
Pros: Significant self-employment tax savings if you pay yourself a reasonable salary—distributions beyond your salary are not subject to Social Security and Medicare tax.
Cons: Requires running payroll, issuing W-2s, and documenting a reasonable salary for owners.
Best for: Consistently profitable businesses with owners who actively participate in operations.
If you're making solid, higher profits, S Corp status could save you thousands annually. For new or lower-profit ventures, LLC offers maximum ease, flexibility, and minimal ongoing paperwork.
Let's clear up a common misconception that LLC and S Corp are mutually exclusive business forms. An S Corp is a tax status, not a separate legal entity. An LLC is a flexible business structure offering personal liability protection.
To use S Corp taxation, you first form an LLC or corporation and then file IRS Form 2553 to elect S Corporation status for federal tax purposes
A limited liability company (LLC) is a legal business structure protecting your personal assets from business debts through limited liability protection. You form an LLC or C Corporation first, then elect S Corp tax status by filing IRS Form 2553.
LLC Formation & Structure:
File Articles of Organization with your state
Unlimited LLC members allowed
Flexible management for day to day operations
Minimal requirements
S Corp Tax Election:
File Form 2553 with the IRS
Limited to 100 shareholders, U.S. citizens only
Requires shareholder meetings
Must run payroll for owner-employees
According to the Hailey-Petty Law Firm, "One of the standout features of an LLC is its tax flexibility. Unlike other business entities that have rigid tax structures, an LLC allows its members to choose how they wish to be taxed. This can be as a sole proprietorship, a partnership, or, if the LLC chooses, as a corporation."
Many small businesses start as LLCs and later elect S Corp status when when profit levels make it financially advantageous.
Limited liability companies offer tax flexibility with significant LLC tax benefits.
LLCs avoid double taxation. Business profits flow to your personal tax returns where you pay income tax once. Compare this to a C Corporation (C Corp), where profits get taxed at the corporate level and again on dividends. An LLC structure skips that second tax hit.
A single member LLC defaults to sole proprietorship taxation filing Schedule C. Multi member LLCs default to partnership taxation, reporting partnership income on personal tax returns. You can also elect S Corp or C Corp status for federal tax purposes.
LLC owners deduct legitimate business expenses and claim itemized deductions before calculating taxable income. These tax deductions reduce your business income subject to taxation.
The QBI deduction lets eligible LLC members deduct up to 20% of qualified business income. For a trade or business earning $100,000 in net earnings, that's a $20,000 deduction.
LLCs without S Corp election don't require payroll systems. Take owner draws whenever needed without processing paychecks or quarterly reports.
The trade-off? LLC taxes include self employment tax on all business income.
S Corporation taxation offers substantial tax benefits for self employed individuals.
As an S Corp owner working in the business, you're both employee and owner for federal income tax purposes.
As an S Corp owner actively working in the business, you must pay yourself a “reasonable salary” that is subject to payroll (FICA) taxes. Remaining profits, called distributions, are not subject to self-employment tax, making this the primary source of potential tax savings compared to an LLC taxed as a sole proprietorship or partnership.
District Legal Group explains: "S Corporations also have pass-through taxation, but with an added benefit: owners who actively work in the business can pay themselves a 'reasonable salary' and take the remaining profits as distributions, which are not subject to self-employment tax. This can lead to significant tax savings."
If your business profits $120,000 annually, as an LLC you'd pay $18,360 in employment tax.
For example, with S Corp status, if you pay yourself a $60,000 reasonable salary and take $60,000 as distributions from $120,000 in profits, only the salary is subject to payroll taxes. This could result in several thousand dollars in tax savings each year compared to paying self-employment tax on the full profit as an LLC.
S Corporations must pay owner-employees a reasonable salary based on industry, role, location, and market rates for federal tax purposes. The IRS scrutinizes low salaries, and tax consequences can be severe.
Payroll Requirements
Run payroll consistently
Withhold federal income tax, Social Security, and Medicare taxes
File Form 941 quarterly
Issue W-2s on your income tax return
Pay federal and state taxes
File Form 1120-S annually
According to Acuity Tax Experts, "With an S Corp election, you can reduce your self-employment taxes through pre-tax health and dental benefits and strategically setting your salary. This not only saves you money, but it also helps you optimize your business's financial health."
Common Pitfalls
Setting salary too low
Missing quarterly federal tax deposits
Not budgeting for payroll costs ($1,000-$3,000 annually)
Taking distributions before paying reasonable salary
For profitable pass through entities, tax savings exceed these expenses.
Self employment tax is crucial in the LLC vs S Corp decision for small business owners.
Self employment tax covers Social Security and Medicare contributions—12.4% for Social Security and 2.9% for Medicare taxes, totaling 15.3%. This employment tax is separate from federal income tax.
LLC owners pay self employment tax on entire net earnings. Every dollar of business income subject to self employment tax gets hit with 15.3%. If your LLC earns $100,000, you owe $15,300 before calculating income tax on personal tax returns.
S Corporation owners pay payroll taxes (FICA taxes) only on salary. Distributions bypass self employment tax because they're not wages for federal tax purposes—a key tax benefit of S Corp status.
With $100,000 profit: a $50,000 reasonable salary and $50,000 in distributions means you only pay Social Security and Medicare taxes on $50,000—roughly $7,650 instead of $15,300.
Tax professionals suggest small business owners consider S Corp election when business income exceeds $60,000-$80,000 annually. If potential tax savings exceed $3,000-$5,000, S Corp status makes financial sense.
| Feature | LLC | S Corp |
|---|---|---|
| Ownership | Unlimited LLC members | Maximum 100 shareholders |
| Pass-Through Taxation | Yes | Yes |
| Self Employment Tax | On full business income | Only on salary |
| Payroll | None | Mandatory |
| Management | Flexible | Formal with shareholder meetings |
| Personal Liability | Limited liability protection | Limited liability protection |
| Best For | New businesses, lower profits | Higher profits |
Choose a Limited Liability Company When:
Testing your business concept
Annual business income below $60,000-$80,000
Want flexibility including unlimited partners
Prefer simplicity (rental real estate investors often prefer this)
Operating as a sole proprietorship needing asset protection
Choose S Corporation Election When:
Business income consistently over $80,000
Actively work in your trade or business
Comfortable with payroll and eligibility requirements
Can justify reasonable salary
Want employment tax savings and tax benefits
Consulting firms often benefit from S Corp at $100,000+ annually. E-commerce businesses start with LLC flexibility, then elect S Corp when profits stabilize.
Most businesses start as single member LLC or multi member LLC, then transition to S Corp as pass through entity when profits justify it.
Maria's Graphic Design Business
Maria earns $35,000 in business income. As an LLC, she pays $5,355 in self employment tax on Schedule C. S Corp payroll costs would eat most tax savings.
Smart move: Stay as LLC until income exceeds $70,000, protecting personal assets through limited liability.
James and Sarah's Marketing Firm
Their agency generates $250,000 in annual profits. As an LLC, they'd pay $38,250 in self employment tax on personal tax returns.
With S Corp election taking $70,000 reasonable salaries each, they only pay FICA taxes on salaries—$21,420 total. Tax savings of $16,830 annually avoids double taxation issues.
They researched reasonable salary ranges, understanding tax consequences and protecting owners personal assets.
Neither LLC nor S Corporation is universally better—the right business structure depends on your financial situation and how actively you work in your company.
Limited liability companies offer simplicity and personal liability protection. S Corporation taxation delivers significant self employment tax savings for profitable pass-through entities where business owners actively work.
If your business generates income over $80,000 annually, S Corp election probably saves thousands in employment tax yearly. Below that, LLC simplicity wins for most businesses.
Many small business owners start with single member LLC or multi member LLC and elect S Corp tax status later.
Understanding income tax implications, corporation taxes, and which business entities provide best tax benefits requires professional guidance.
LLC tax benefits include pass-through taxation (avoiding double taxation at corporate level and personal level), flexible tax treatment for tax purposes, tax deductions on business expenses, and 20% qualified business income deduction eligibility. LLCs avoid payroll requirements while providing limited liability protection for personal assets.
S Corporation owners must pay reasonable salary through formal payroll: withholding payroll taxes (FICA taxes for Social Security and Medicare taxes), filing Form 941 quarterly, depositing federal tax per IRS schedules, and issuing W-2s on income annually.
Yes. Start as limited liability company and elect S Corporation tax status by filing Form 2553 for federal income tax purposes. Most small business owners form as LLC for limited liability, then elect S Corp taxation to reduce self-employment tax.
Reasonable salary means paying yourself market rates for your work in your trade or business. The IRS compares salary to industry benchmarks and net earnings. Most recommend 40-60% of profits to avoid tax consequences.
Yes, for certain businesses. S Corporations let business owners take business income as distributions avoiding 15.3% self employment tax. Businesses profiting over $60,000-$80,000 see net tax savings after payroll costs. S Corp is among the most tax-efficient pass-through entities for profitable small businesses.
The right business structure puts money back in your pocket through tax benefits and asset protection.
Our team assists with limited liability company formations and S Corporation elections for federal tax purposes.
We offer:
LLC formation services nationwide
S Corporation election filing and IRS documentation
Registered agent services to help maintain privacy and meet state requirements
Compliance assistance for a range of business entity needs
Support from professionals knowledgeable in business entity maintenance and federal filing procedures
Please note: The information provided here is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Every business has unique needs and requirements. Before making decisions about entity formation or tax status, consider consulting with a qualified attorney or tax advisor to determine what is best for your circumstances.
Ready to get started? Our team can help guide you through documentation and filing steps for LLC formation and S Corporation election.
