LLC vs S-Corp: Which One Actually Saves You More Tax?

Ask ten founders whether you should elect S-Corp status and you'll hear ten confident, contradictory answers. The truth is refreshingly boring: it's arithmetic. An S-Corp saves you money only when the self-employment tax you avoid is bigger than the new costs it creates — and that crossover point is predictable.

First, what each option actually is

An LLC is a state-level legal structure. By itself, it changes nothing about your federal taxes: a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC as a partnership. You pay income tax plus 15.3% self-employment (SE) tax on your profit.

An S-Corp is not a business type — it's a tax election (Form 2553) that an LLC or corporation can make. With it, you pay yourself a salary (which carries payroll tax) and take the remaining profit as distributions, which do not carry SE tax. That gap is the entire opportunity.

The math at three profit levels

Assume you're the only owner, and the IRS would accept a "reasonable salary" of about 50–60% of profit (it must be defensible for your role and industry):

• $40,000 profit, default LLC: SE tax ≈ $5,652. As S-Corp with a $30k salary: payroll tax ≈ $4,590 — saving ~$1,060, but payroll processing and the extra tax return typically cost $1,200–$2,000/yr. Verdict: you lose money.
• $80,000 profit, default LLC: SE tax ≈ $11,304. As S-Corp with a $45k salary: payroll tax ≈ $6,885 — saving ~$4,400 against ~$1,500 of extra costs. Verdict: roughly $2,500–$3,000/yr ahead.
• $150,000 profit, default LLC: SE tax ≈ $19,600 (the Social Security portion caps out). As S-Corp with a $75k salary: payroll tax ≈ $11,475 — saving ~$8,100. Verdict: clearly worth it.

The rule of thumb

Below about $40,000–$50,000 in annual profit, S-Corp costs (payroll service, a separate Form 1120-S return, possible state fees) usually eat the savings. Above $60,000, it usually wins — and the win grows with profit. Between those numbers, run your exact salary split with a CPA; one hour of their time costs less than a wrong election.

Three traps nobody mentions

• The salary must be reasonable. Paying yourself $12,000 on $200,000 of profit to dodge payroll tax is the IRS's favorite audit target in this area.
• Some states tax S-Corps extra. California, for example, adds a 1.5% S-Corp tax, and New York City doesn't recognize the election at all.
• You'll need real payroll. Even with one employee (you), that means payroll software, quarterly filings, and unemployment insurance — budget $600–$1,200/yr before accounting.

Bottom line: form the LLC first (the state cost is the same either way — use the calculator to find yours), grow into consistent profit, then elect S-Corp status when the math crosses over. You can file Form 2553 later; there's no penalty for waiting until it actually pays.

Fees verified against official state sources — last checked October 26, 2026.