LLC vs S-Corp is one of the most consequential tax decisions for small business owners. Both offer pass-through taxation and liability protection — but the S-Corp structure lets you pay yourself a salary and take remaining profits as distributions, potentially saving thousands in self-employment tax each year. The right choice depends on your net income, administrative tolerance, and growth plans. This tool provides general information only, not legal advice. Consult a licensed attorney or CPA for guidance specific to your situation.
Self-Employment Tax Calculator
Must be "reasonable compensation" for your role — typically 40-60% of profits
Payroll service (~$600/yr) + CPA for payroll returns (~$1,000-2,000/yr)
Enter your figures and click Calculate to see your potential S-Corp tax savings.
Side-by-Side Comparison
| Factor | LLC | S-Corp |
|---|---|---|
| Formation | Articles of Organization $50–500 state fee | Articles of Incorporation + Bylaws + Form 2553 $50–500 + IRS filing |
| Taxation | Pass-through (Schedule C or K-1) All profit taxed as SE income | Pass-through (Form 1120-S / K-1) Only salary subject to SE tax |
| Self-Employment Tax | 100% of profit (15.3%) | Salary only (distributions exempt) |
| Salary Requirement | None | Required — "reasonable compensation" |
| Ownership | Unlimited members, any type including corporations | Max 100 shareholders, US citizens/residents only, one class of stock |
| Annual Paperwork | Minimal Annual report, Schedule C or K-1 | More burdensome Payroll, Form 1120-S, annual minutes |
| Liability Protection | Strong (if formalities maintained) | Strong (if formalities maintained) |
| Best For | Startups, low-profit businesses, those wanting flexibility | Profitable businesses ($40K+ net), those comfortable with payroll |
How to Decide Between an LLC and S-Corp
The LLC vs S-Corp decision comes down to one number: how much self-employment tax will you save versus how much extra it costs to run an S-Corp payroll. At $40,000 net profit, the savings rarely justify the cost. At $100,000 net profit, the math typically favors the S-Corp by $4,000-8,000 per year.
Understanding Self-Employment Tax
As an LLC member, you pay 15.3% self-employment tax on your entire net profit (above $168,600, the Medicare-only portion is 2.9%). On $100,000 of profit, that's $15,300 in SE tax (in addition to income tax). An S-Corp owner who pays themselves a $60,000 salary and takes $40,000 as distributions only pays SE tax on the $60,000 salary — saving approximately $6,120 annually.
The "Reasonable Salary" Rule
The IRS requires S-Corp owner-employees to pay themselves a reasonable salary for services rendered — comparable to what you'd pay an outside hire. If you provide $200,000 in services and pay yourself $20,000, the IRS can reclassify distributions as wages, imposing back payroll taxes plus 20% penalties. A safe approach: salary at 40-60% of net profit, documented with comparable market compensation data.
S-Corp Election for LLCs
You don't need to form a new corporation — an existing LLC can elect S-Corp tax treatment by filing Form 2553. You get LLC simplicity for state law purposes (easier operating agreements, no annual shareholder meetings required by state law) with federal S-Corp tax treatment. To be effective for a given year, file Form 2553 by March 15 for calendar-year elections, or within 75 days of formation for new entities.
When LLC Is Better
Stick with a plain LLC if: net profit is below $40,000/year, you're building a venture-backed startup (investors often can't hold S-Corp stock), you have foreign investors or co-owners, you want maximum flexibility in profit-sharing (LLC operating agreements are highly customizable), or you're in the early years and expect losses (LLC losses pass through without S-Corp salary complications).
FAQ
Is this LLC vs S-Corp comparison tool free?
Yes, completely free with no signup required. This tool provides general information only, not legal advice. Consult a licensed attorney or CPA for guidance specific to your situation.
At what income level does an S-Corp save money on taxes?
The typical break-even point is $40,000-$60,000 in annual net business profit. Below this level, the extra costs of S-Corp compliance (payroll processing ~$50/month, bookkeeping, CPA for payroll returns ~$1,000-3,000/year) often exceed the SE tax savings. At $80,000 net profit, an S-Corp paying $50,000 salary could save ~$4,500/year in self-employment taxes.
What is 'reasonable compensation' for an S-Corp?
The IRS requires S-Corp owner-employees to pay themselves a 'reasonable salary' for their services — comparable to what the business would pay a non-owner employee to perform the same role. If you pay yourself $30,000 and take $200,000 in distributions, the IRS may recharacterize the distributions as wages. The IRS actively audits S-Corps with low or zero owner salaries.
What is self-employment tax and how does an S-Corp reduce it?
Self-employment (SE) tax is 15.3% (12.4% Social Security + 2.9% Medicare) on the first $168,600 of net earnings, and 2.9% above that. An LLC member pays SE tax on 100% of profits. An S-Corp owner pays SE tax only on their salary, not on distributions. If you pay yourself a $60,000 salary and take $80,000 in distributions, you avoid ~$12,240 in SE tax on those distributions (15.3% × $80K).
Can my LLC elect to be taxed as an S-Corp?
Yes. An LLC can elect S-Corp tax treatment by filing Form 2553 with the IRS. The LLC retains its legal structure (easier state compliance) but is taxed as an S-Corp federally. This is called an 'S-Corp election' or 'check-the-box election.' This is the most popular approach for small businesses — you get LLC simplicity with S-Corp tax treatment.
What are the S-Corp ownership restrictions?
S-Corps have strict eligibility requirements: maximum 100 shareholders, shareholders must be US citizens or residents (not other corporations or partnerships), only one class of stock allowed, and ineligible for certain industries (financial institutions, insurance companies, international sales companies). LLCs have no ownership restrictions and can have multiple member classes.