LLC vs S-Corp Tax Comparison
Compare LLC and S-Corp tax treatment. See self-employment tax savings and determine which structure is better for your income.
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What is LLC vs S-Corp Tax Comparison?
The LLC vs S-Corp decision primarily affects how your business income is taxed. An LLC (default) subjects all net income to 15.3% self-employment tax. An S-Corp allows you to split income between salary (subject to payroll tax) and distributions (not subject to SE tax), potentially saving thousands per year. However, S-Corps come with higher compliance costs and complexity. This calculator shows the exact tax savings for your income level.
Which is Better for You?
The right choice depends on your specific situation. Here are the most common decision scenarios:
Net income under $50,000
S-Corp compliance costs ($1,000-$3,000/year for payroll, tax returns, registered agent) often exceed the self-employment tax savings at low income levels.
Net income $80,000-$200,000
This is the sweet spot. SE tax savings on the distribution portion ($50,000-$130,000 not subject to 15.3% SE tax) significantly exceeds S-Corp compliance costs.
You want the simplest possible structure
LLCs have minimal compliance requirements — no payroll, no separate tax return (single-member), no reasonable salary determination. S-Corps require payroll processing, quarterly tax deposits, and a separate corporate return.
You reinvest most profits back into the business
S-Corp distributions must be reasonable relative to salary. If most income is reinvested, the S-Corp structure provides less tax benefit while adding compliance burden.
Related Comparisons
For authoritative guidance, see IRS — S Corporation Information.
Frequently Asked Questions
How does an S-Corp save on taxes?
As an LLC, all net income is subject to 15.3% self-employment tax. As an S-Corp, only your salary is subject to payroll taxes. The remaining profit distributed as dividends avoids SE tax. On $120,000 income with a $70,000 salary, you save ~$7,650 in SE tax (15.3% of $50,000 distribution).
What is a 'reasonable salary' for an S-Corp?
The IRS requires S-Corp owner-employees to pay themselves a 'reasonable salary' — typically what you'd pay someone else to do your job. Factors include industry norms, experience, hours worked, and company revenue. Setting salary too low to avoid payroll taxes is an IRS audit trigger.
When should I switch from LLC to S-Corp?
The general rule: when your net business income consistently exceeds $50,000-$60,000/year, the SE tax savings outweigh the S-Corp compliance costs. Consult a CPA for your specific situation — the break-even depends on your salary, state taxes, and compliance costs.
What are the compliance costs of an S-Corp?
Annual costs include: payroll processing ($500-$1,500/year), corporate tax return preparation ($1,000-$2,500), registered agent ($100-$300), state annual report fees ($25-$800), and potentially quarterly estimated tax payments. Total: roughly $1,500-$4,000/year.
Can I have an LLC taxed as an S-Corp?
Yes. You don't need to form a separate corporation. File IRS Form 2553 to elect S-Corp tax treatment for your existing LLC. You get the tax benefits of S-Corp status while maintaining the simplicity and liability protection of the LLC structure.
The tools and calculators provided on The Simple Toolbox are intended for educational and informational purposes only. They do not constitute financial, legal, tax, or professional advice. While we strive to keep calculations accurate, numbers are based on user inputs and standard assumptions that may not apply to your specific situation. Always consult with a certified professional (such as a CPA, financial advisor, or attorney) before making significant financial or business decisions.
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