S-Corp vs. LLC: Which Actually Saves You More in Taxes?

If you've been searching this question, you've probably run into a lot of confident-sounding claims and not a lot of actual math. Here's the real answer: it depends entirely on your profit level, and below a certain threshold, an S-Corp election can cost you more than it saves.

First, a common misconception

An LLC and an S-Corp aren't two competing entity types you choose between at formation. An LLC is a legal structure (it protects your personal assets). An S-Corp is a tax election you can make on top of an LLC, using IRS Form 2553. So the real question isn't "LLC or S-Corp" — it's "should my LLC elect S-Corp tax treatment?"

Where the savings actually come from

If your LLC is taxed as a sole proprietorship (the default), all of your net profit is subject to self-employment tax — 15.3% (12.4% Social Security + 2.9% Medicare), on top of regular income tax.

Elect S-Corp treatment, and the math changes: you pay yourself a "reasonable salary" as a W-2 employee, and only that salary is subject to payroll tax (the S-Corp equivalent of self-employment tax). Any remaining profit gets paid out as a distribution — and distributions aren't subject to that 15.3% at all.

That gap between "everything gets taxed" and "only your salary gets taxed" is the entire savings mechanism.

A rough example

Say your business nets $100,000 in profit.

As a standard LLC: you'd owe roughly $14,000–$15,000 in self-employment tax on that full amount.

As an S-Corp, paying yourself a reasonable salary of, say, $55,000–$60,000: only that salary portion is subject to payroll tax. The remaining profit passes through as a distribution, tax-free of payroll tax. Net savings after accounting for the added costs of running payroll typically land somewhere in the $5,000–$8,000 range at this profit level — and the gap widens considerably as profit grows.

These numbers move around based on your actual salary determination, state, and other income — they're illustrative, not a quote for your specific situation.

The catch: it's not free

S-Corp status comes with real costs and obligations:

• Running payroll for yourself, typically $500–$2,000/year in service fees
• A separate business tax return (Form 1120-S), usually more expensive to prepare than a Schedule C
• The "reasonable salary" requirement — the IRS actively scrutinizes owners who pay themselves too little to dodge payroll tax. Get this wrong and you're exposed to back taxes and penalties.
• State-level quirks — some states add their own franchise taxes or fees on S-Corps

So when does it actually make sense?

As a rough rule of thumb: once your net profit consistently clears roughly $40,000–$50,000, the payroll tax savings usually start to outweigh the added administrative cost. Below that, the compliance overhead often eats most or all of the benefit — an LLC taxed as a sole proprietorship is simpler and just as tax-efficient at low profit levels.

Above roughly $80,000–$100,000 in profit, the case for electing S-Corp status gets considerably stronger.

What this doesn't account for

This whole comparison only covers the self-employment/payroll tax angle. It doesn't factor in the Qualified Business Income (QBI) deduction, state-specific rules, your plans to raise money or bring on investors, or how you're planning to eventually sell the business — all of which can shift the right answer. This is exactly the kind of decision where a quick "should I switch" Google search isn't enough; it deserves an actual look at your numbers.

Where we come in

We help growing businesses figure out not just whether an S-Corp election makes sense, but when — because switching too early wastes money on compliance costs, and switching too late leaves real savings on the table every year you wait. It's one part of the broader tax strategy work we do, and our approach is built around where your business actually stands today, not a one-size-fits-all rule. Learn more about our team.

Curious what this would look like for your specific numbers? Take our free CFO-Readiness Check for a quick read on where your business stands, or book a free strategy call and we'll run the actual math together.