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LLC vs. S-Corp: When Does an S-Corp Actually Save You Money?
The short answer: an LLC is a legal structure; an S-corp is a tax election an LLC can make. As a regular single-member LLC you pay 15.3% self-employment tax on all your profit. As an S-corp you pay that tax only on a reasonable salary, and take the rest as distributions. It usually starts to pay off when your profit is about $15,000–$20,000 more than a fair salary for your work, after payroll and tax prep costs. Use the calculator below for your numbers.
LLC and S-corp aren't the same kind of thing
- LLC (limited liability company) is a business you form with your state. It separates business debts and lawsuits from your personal assets. By default, the IRS ignores a single-member LLC for income tax: the profit goes on your Schedule C and you pay self-employment tax, just like a sole proprietor (IRS: single-member LLCs).
- S-corp is a tax status. An LLC (or a corporation) files Form 2553 to be taxed as an S corporation. The legal protection stays the same; only the taxes and paperwork change.
So the real question isn't "LLC or S-corp." It's "should my LLC elect S-corp taxes yet?" If you haven't formed an LLC, start with do you need an LLC.
How an S-corp saves money
As a default LLC, your whole profit is hit by 15.3% self-employment tax (12.4% Social Security up to the $184,500 wage base in 2026, plus 2.9% Medicare). As an S-corp, you're an employee of your own business:
- You pay yourself a reasonable salary through payroll. The business and you together pay the same 15.3% on that salary.
- The rest of the profit comes to you as a distribution, which isn't subject to Social Security or Medicare tax.
- Income tax still applies to all of it, salary and distributions alike.
The savings are roughly 15.3% of the profit above your salary, minus the extra costs of running an S-corp.
S-corp savings calculator
What an S-corp costs to run
- Payroll for your salary: a payroll service often runs $40–$80 a month, and handles quarterly payroll filings and your W-2.
- A separate tax return (Form 1120-S) and a K-1 for you. Expect your accountant's fee to go up, often by $500–$1,500 or more.
- State taxes in some places: California charges S-corps 1.5% of net income with an $800 minimum, and New York City taxes S-corp profit at 8.85%. See S-corp tax in California and New York City.
- State unemployment tax on your salary, and more bookkeeping to keep salary and distributions straight.
What it looks like at different profits
| Profit | Salary $35,000 | Salary $50,000 | Salary $70,000 |
|---|---|---|---|
| $50,000 | $68 | −$2,227 | — |
| $60,000 | $1,481 | −$814 | — |
| $80,000 | $4,307 | $2,012 | −$1,048 |
| $100,000 | $7,133 | $4,838 | $1,778 |
| $150,000 | $14,197 | $11,902 | $8,842 |
| $200,000 | $21,237 | $18,942 | $15,882 |
Yearly federal payroll tax savings after $1,600 of extra costs (payroll service and the S-corp tax return), 2026 rates, a state with no S-corp tax. A dash means the salary is higher than the profit.
The pattern: the S-corp break-even is roughly your salary plus $15,000 to $18,000 of profit. That's why the popular "$80K rule" is right for some owners and wrong for others. See when to elect S-corp: the $80K rule, tested.
The catch: your salary has to be reasonable
The IRS requires S-corp owners who work in the business to take reasonable compensation before taking distributions, and it can reclassify distributions as wages if the salary is too low (IRS: S corporation compensation). Setting salary is the biggest decision in this whole comparison; see S-corp reasonable salary.
Other things that change the answer
- The 20% business income deduction is figured on profit after your salary, so an S-corp salary shrinks it a little.
- High incomes: above the $184,500 Social Security wage base, only the 2.9% Medicare part is saved on extra profit.
- Retirement: Solo 401(k) contributions are based on your W-2 salary in an S-corp, so a low salary can limit them.
- Health insurance: for owners with more than 2%, premiums paid by the S-corp go on your W-2 and you deduct them on your personal return (IRS: S corporation compensation).
How to switch
File Form 2553 with the IRS. For the election to cover all of 2027, it's due March 15, 2027, or you can file any time during 2026. Then set up payroll before your first salary payment. Step by step: how to elect S-corp (Form 2553). Once it's in place, here's how to pay yourself from an LLC.
FAQ
Is an S-corp better than an LLC?
They're different things. An LLC is a legal structure; an S-corp is a tax election an LLC can make. Electing S-corp saves self-employment tax once your profit is well above a reasonable salary, usually about $15,000–$20,000 above it after costs.
At what profit does an S-corp make sense?
It depends on your reasonable salary. Break-even is roughly your salary plus $15,000–$18,000 of profit. With a $50,000 salary that's about $66,000 of profit; with a $35,000 salary, about $50,000.
Do I lose LLC protection if I elect S-corp?
No. Electing S-corp changes how the IRS taxes your LLC, not its legal protection under state law.
How much does an S-corp cost to run?
Usually $1,000–$3,000 a year more than a regular LLC: payroll service, a separate S-corp tax return, and in some states extra state tax.
Sources: IRS: single-member LLCs · IRS: S corporation compensation · IRS: self-employment tax · 2026 Social Security wage base · IRS: About Form 2553. General information for planning, not tax, legal or financial advice.