Your Business Details
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Tax Comparison
LLC SE Tax
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S-Corp SE Tax
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Annual Tax Savings with S-Corp
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LLC: Self-Employment Tax (15.3%)—
S-Corp: Payroll Tax on Salary Only—
S-Corp: Distribution (no SE tax)—
S-Corp Overhead (payroll, filing ~$2k)~$2,000/yr
Net Annual Savings (after S-Corp costs)—
LLC vs S-Corp: The Self-Employment Tax Strategy
The biggest tax advantage of an S-Corp over a sole proprietorship or single-member LLC is the ability to split your income into a "reasonable salary" (subject to payroll taxes) and "distributions" (not subject to self-employment tax). Since SE tax is 15.3% on the first ~$168,000 of net income, this can save thousands for profitable businesses.
How the S-Corp Strategy Works
As a sole proprietor or LLC, 100% of your net business income is subject to 15.3% self-employment tax. As an S-Corp owner, you pay yourself a reasonable salary (subject to payroll taxes) and take the remaining profit as a "distribution" — which avoids the 15.3% SE tax entirely. The key word is "reasonable" — the IRS requires it to reflect fair market compensation for the work you do.
When Does S-Corp Status Make Sense?
- Net business profit consistently above $50,000–$80,000/year
- The SE tax savings exceed the additional administrative costs (~$1,500–$3,000/year for payroll, tax filings)
- You're willing to run payroll and file separate S-Corp tax returns
Frequently Asked Questions
What is a "reasonable salary" for S-Corp purposes? ▼
The IRS requires S-Corp owner-employees to pay themselves a reasonable salary — what you'd pay an employee doing the same job. There's no precise formula, but you should be able to justify it based on industry data (BLS wage statistics, job sites). Setting an artificially low salary to maximize distributions is a red flag for IRS audit. Most advisors recommend salary in the range of 40–60% of total compensation for service businesses.
Can an LLC elect S-Corp status? ▼
Yes. An LLC can elect to be taxed as an S-Corp by filing IRS Form 2553. You remain an LLC legally (with all the liability protection and operating agreement flexibility), but you're taxed as an S-Corp. This "LLC taxed as S-Corp" structure is extremely common and gives you the liability protection of an LLC with the SE tax savings of an S-Corp.