LLC vs S-Corp: Which Structure Actually Saves You Money
A worked comparison of self-employment tax, payroll requirements, and paperwork burden to help you figure out when an S-corp election is actually worth the hassle.
In this article 7 sections
Quick answer: An LLC taxed as a sole proprietorship is simpler and cheaper to run but exposes 100% of your profit to the 15.3% self-employment tax. An S-corp election lets you split income into a salary (subject to payroll tax) and distributions (not subject to self-employment tax) — but it adds real payroll and filing overhead that only pays off once your profit clears a meaningful threshold.
I've walked through this decision with founders who assumed "S-corp" was just a more advanced, more legitimate-sounding version of an LLC — something to graduate into once the business felt more real. That's not quite it. The decision is almost entirely mechanical, and it comes down to one question: does the tax savings from an S-corp election outweigh the extra cost of running payroll and filing a separate business tax return?
How the Default LLC Actually Gets Taxed
By default, a single-member LLC is a "disregarded entity" for tax purposes — profit flows straight to your personal return via Schedule C, and the entire net profit is subject to the 15.3% self-employment tax (12.4% Social Security plus 2.9% Medicare, per the IRS's small business and self-employed guidance). On $100,000 of net profit, that's roughly $15,300 before you even get to ordinary income tax. Multi-member LLCs work similarly, just filed as a partnership return with profit passed through to each member.
This structure is genuinely simple: one tax return, no payroll to run, minimal ongoing compliance beyond your state's annual LLC filing. For a lot of businesses — especially in their first year or two, or at lower profit levels — that simplicity is worth more than any theoretical tax savings from a more complex structure.
What Changes With an S-Corp Election
File IRS Form 2553 and your LLC (or corporation) can be taxed as an S-corp instead. The mechanical difference: you now have to pay yourself a "reasonable salary" through actual payroll, with taxes withheld like any employee. Only that salary portion is subject to payroll tax. Whatever profit remains after salary is distributed to you as a shareholder distribution — and that portion is not subject to self-employment or payroll tax at all.
On $120,000 in net profit with a $60,000 reasonable salary, only that $60,000 is subject to payroll tax — the other $60,000 in distributions avoids the 15.3% self-employment tax entirely, saving roughly $9,000 a year at that income level.
"Reasonable salary" is doing a lot of work in that sentence, and it's not a number you get to invent. The IRS expects your salary to reflect what someone doing your actual job would be paid in the open market — pay yourself an unreasonably low salary purely to dodge payroll tax, and it's one of the more common triggers for an audit.
The Overhead an S-Corp Adds
None of the S-corp savings are free. Running payroll — even for a single owner-employee — typically means a payroll service ($40-$100/month), a separate business tax return (Form 1120-S, usually $600-$1,500 with a preparer instead of a simple Schedule C), and more rigorous bookkeeping to keep salary and distributions cleanly separated. All in, that's commonly $2,000-$4,000 a year in added cost depending on your location and how much of it you handle yourself.
That's the whole comparison in miniature: the S-corp election saves you real money on self-employment tax, but it costs real money to administer. The question is purely arithmetic — does the tax savings clear the added overhead?
Working the Break-Even Point
As a directional rule of thumb, the crossover tends to land somewhere between $60,000 and $80,000 in net profit for a lot of solo operators and small teams, though your specific numbers — state, industry, how much of the payroll administration you can handle yourself — will move that threshold. Below it, the fixed cost of running payroll and a separate return usually eats most or all of the self-employment tax you'd save. Above it, the savings tend to outpace the overhead by a widening margin as profit grows, since the added cost of payroll and filing stays roughly fixed while the tax savings scale with income.
If you've read our breakdown of break-even analysis, the exercise here is structurally identical — you're comparing a fixed cost (payroll and filing overhead) against a variable benefit (tax savings that scale with profit) to find the crossover point where one option starts beating the other.
LLC vs. S-Corp at a Glance
| Factor | Default LLC | S-corp election |
|---|---|---|
| Self-employment tax | Applies to 100% of net profit | Applies only to salary portion |
| Payroll required | No | Yes, for the owner-employee |
| Tax return complexity | Schedule C or partnership return | Separate 1120-S corporate return |
| Annual added overhead | Minimal | Roughly $2,000-$4,000 |
| Best fit | Lower profit, simpler operations | Consistent profit above roughly $60k-$80k |
A Few Things People Get Wrong About the Election
The most common misconception is that an S-corp is somehow a "better" or more legitimate structure — a milestone to hit as your business matures. It isn't. It's purely a tax election, and plenty of large, successful businesses run for years as default LLCs because the numbers simply don't favor the switch yet. Making the election prematurely, before profit is consistent enough to justify the overhead, mostly just adds cost and complexity without a corresponding benefit. Data from the Census Bureau's Statistics of U.S. Businesses shows the vast majority of small businesses operate with fewer than five employees and modest profit levels — exactly the range where the added S-corp overhead is most likely to outweigh the tax benefit, which is worth keeping in mind before assuming the election is automatically the more "serious" choice.
The second common mistake is treating "reasonable salary" as a number you get to set purely to minimize taxes. The IRS has pursued S-corp owners specifically for paying themselves an artificially low salary relative to what the role would command in the open market — a defensible salary benchmark, ideally documented against comparable roles in your industry and region, is part of doing this correctly rather than an afterthought.
Finally, remember that the election isn't permanent or one-directional. If your profit drops, or the added administrative burden isn't worth it anymore, you can revoke the S-corp election and revert to default LLC taxation. Treat it as a decision you revisit annually alongside your other financial planning, not a one-time choice you make and forget.
For related reading, our piece on reading a P&L statement covers adjacent ground worth a look. And for a broader, outside reference point, the Small Business Administration's business guide is a useful resource to have on hand alongside this topic.
Conclusion
Neither option is universally "better" — this is a math problem specific to your profit level, not a badge of business maturity. Run your own numbers: estimate a reasonable salary for your role, calculate the self-employment tax savings on the remaining distributions, and weigh that against what payroll and a separate return will actually cost you to run. If the business isn't consistently clearing that threshold yet, the simplicity of a default LLC is very likely still the right call — you can always make the election later once the numbers actually favor it.
