S-Corp vs LLC for Business Owners: Which Saves More on Taxes?

Choosing the right business entity is one of the most impactful tax decisions a business owner can make. The difference between operating as a standard LLC and electing S-Corp status can mean thousands of dollars in tax savings each year — or unnecessary costs and complexity if you make the wrong choice. In this guide, we break down exactly how each structure works, compare them side-by-side at different income levels, and help you determine which one is right for your business.

Understanding the Default: Single-Member LLC Taxation

When you form an LLC and don't make any special tax elections, the IRS treats it as a "disregarded entity." That means all of your business income flows through to your personal tax return on Schedule C. You pay income tax on your net profit, plus self-employment tax — which covers Social Security and Medicare.

The self-employment tax rate is 15.3% on the first $168,600 of net earnings (2024 threshold, adjusted annually for inflation). This is made up of 12.4% for Social Security and 2.9% for Medicare. You get to deduct half of the self-employment tax on your 1040, but the full 15.3% still hits your bank account. For a business netting $100,000, that's over $14,000 in self-employment taxes alone — before income tax.

How S-Corp Election Changes the Tax Math

An S-Corp election (filed with IRS Form 2553) doesn't change your LLC's legal structure — it changes how the IRS taxes it. Instead of all profit being subject to self-employment tax, you split your income into two buckets: a reasonable salary paid to yourself (subject to payroll taxes), and distributions of remaining profit (not subject to self-employment or payroll taxes).

For example, if your LLC nets $120,000 and you pay yourself a reasonable salary of $60,000, only that $60,000 is subject to payroll taxes (the equivalent of self-employment tax). The remaining $60,000 passes through as a distribution, taxed only at your income tax rate. That's a savings of roughly $9,180 in payroll/SE taxes on the distribution portion.

Side-by-Side Tax Comparison: LLC vs S-Corp

Let's compare the tax impact at three common income levels. These estimates assume a single filer taking the standard deduction, with reasonable S-Corp salaries set at approximately 55% of net profit.

As you can see, the savings increase dramatically as income rises. At $80,000 in profit, the savings are modest after accounting for S-Corp compliance costs. But at $120,000 and above, the math becomes very compelling.

When S-Corp Election Makes Sense

S-Corp election tends to be the right move for business owners who meet most of these criteria:

• •Your business consistently nets $50,000 or more in annual profit after deducting all business expenses.
• •You are a service-based business (consulting, freelancing, professional services) where most revenue comes from your personal labor.
• •You plan to operate the business for at least 2-3 more years, giving you time to recoup the setup and ongoing compliance costs.
• •You're comfortable running payroll (or hiring a payroll service) and filing the additional Form 1120-S each year.
• •You want to maximize retirement contributions — S-Corp owners can contribute as both employee and employer to a Solo 401(k) or SEP-IRA based on their W-2 salary.

When to Stay as an LLC

Not every business benefits from S-Corp status. Staying as a standard LLC is often the better choice in these situations:

• •Your net profit is under $40,000–$50,000 per year. At this level, the S-Corp compliance costs (payroll service, additional tax return filing) may eat up most or all of the tax savings.
• •Your business is in its first year or two and income is unpredictable. Wait until you have a consistent track record before adding S-Corp complexity.
• •You value simplicity. An LLC with Schedule C is the simplest tax structure for a solo business owner — one tax return, no payroll to manage, no separate filing deadlines.
• •You're planning to sell the business or bring on investors soon. S-Corp restrictions (one class of stock, 100-shareholder limit, no non-resident alien shareholders) may limit future flexibility.
• •You have significant business losses you're carrying forward. S-Corp basis rules are more restrictive than LLC rules for deducting losses.

Hidden Costs of S-Corp Election

Before making the S-Corp election, business owners should understand the full cost picture beyond tax savings:

• •Payroll processing: You must run payroll for yourself, including withholding income taxes, Social Security, and Medicare. A payroll service typically costs $30–$60/month for a single-employee S-Corp.
• •Form 1120-S filing: S-Corps must file a separate federal tax return (Form 1120-S) in addition to your personal 1040. CPA fees for this additional return typically run $1,000–$2,000.
• •Quarterly payroll tax deposits: You'll need to make timely federal and state payroll tax deposits, usually quarterly. Late deposits trigger penalties.
• •Stricter record-keeping: S-Corps require separate business bank accounts, formal meeting minutes (even if it's just you), and clear documentation of salary vs. distribution payments.
• •March 15 filing deadline: S-Corp returns are due March 15 (or September 15 with extension), one month before your personal return. This creates an additional time pressure during tax season.

Making the Right Choice for Your Business

The S-Corp vs LLC decision isn't one-size-fits-all. It depends on your income level, business type, growth plans, and tolerance for administrative complexity. For many business owners netting above $50,000, the S-Corp election provides meaningful tax savings that compound year after year. But for newer or lower-income businesses, the simplicity of an LLC often wins.

The best approach is to work with a CPA who understands both the federal tax implications and your state-specific considerations. A professional can model your exact situation, account for all costs, and help you make a decision that optimizes your total tax picture — not just one piece of it.