S-Corp vs. LLC: Which Saves You More on Taxes?
This is one of the most common questions small-business owners ask — and the answer isn't "one is better." It's about whether a specific tax election pays for itself.
Direct answer: An LLC and an S-corp aren't really competitors — an LLC is a legal structure, while "S-corp" is a tax election your LLC (or corporation) can make. The election can save you money by reducing self-employment tax, but it also adds payroll, accounting, and compliance costs. For many owners it starts to pay off once net profit is consistently around $80,000 or more.
LLC vs. S-corp: what's actually different?
First, clear up the apples-to-oranges confusion:
- An LLC is a legal entity formed under state law. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership.
- An S-corporation is a federal tax status. An LLC can elect to be taxed as an S-corp by filing Form 2553 — while remaining an LLC legally.
So the real question isn't "LLC or S-corp?" It's "Should my LLC elect S-corp taxation?"
How does an S-corp save on taxes?
The savings come entirely from self-employment tax — the 15.3% that covers Social Security (12.4%) and Medicare (2.9%).
As a default LLC: all of your net profit is subject to self-employment tax (up to the Social Security wage base of $184,500 for 2026 on the Social Security portion; Medicare has no cap).
As an S-corp: you split your income into two buckets:
- A reasonable salary paid to you as a W-2 employee — this is subject to Social Security and Medicare tax.
- The remaining profit, taken as distributions — this is not subject to self-employment tax.
Only the salary gets hit with the 15.3%. The distributions escape it. That's the entire mechanism.
A simplified example
Say your business nets $120,000 in profit. (Illustrative only — your real numbers depend on your salary, state, and deductions.)
| Default LLC | S-corp election | |
|---|---|---|
| Net profit | $120,000 | $120,000 |
| Reasonable salary | — | $70,000 |
| Distributions | — | $50,000 |
| Income subject to 15.3% SE/payroll tax | $120,000 | $70,000 |
| Approx. SE/payroll tax | ~$16,955 | ~$10,710 |
| Rough tax saved | — | ~$6,200 |
(The SE tax uses the 92.35% net-earnings factor; the payroll figure is the combined employer+employee 15.3% on salary. Figures rounded for illustration.)
That ~$6,200 is the headline. But you have to subtract what the election costs you.
What does an S-corp cost?
The savings aren't free. An S-corp brings ongoing expenses and obligations a default LLC doesn't have:
- Payroll setup and processing for your salary (often $500–$1,500+/year)
- A separate business tax return (Form 1120-S) — more accounting work
- Reasonable compensation documentation
- State-level costs — California, for example, imposes a 1.5% franchise tax on S-corp net income (minimum $800/year)
- More bookkeeping discipline overall
When people say an S-corp "makes sense around $80,000," this is why — below that, the added costs can eat most or all of the self-employment tax savings.
The reasonable-salary rule (don't skip this)
The IRS knows exactly what game owners are tempted to play: pay yourself a tiny salary, take everything else as distributions, and dodge payroll tax. So the law requires S-corp owner-employees to take reasonable compensation — roughly what you'd have to pay someone else to do your job.
Set your salary artificially low and you've created an audit trigger. The IRS can reclassify distributions as wages and hit you with back payroll taxes and penalties. Reasonable compensation should be based on real factors: your role, hours, experience, and what the market pays for similar work. This is where a CPA earns their fee.
Don't forget the QBI deduction
Both default LLCs and S-corps can claim the 20% qualified business income (QBI) deduction under Section 199A — and the One Big Beautiful Bill Act made it permanent starting in 2026, with phase-in thresholds of $201,750 (single) and $403,500 (married filing jointly).
Here's the wrinkle: your QBI deduction is based on qualified business income, and an S-corp salary reduces QBI (wages aren't QBI). So a higher salary saves QBI-deduction value while a lower salary saves payroll tax. The optimal salary balances the two — which is exactly the kind of trade-off worth modeling rather than guessing.
So which saves you more?
It depends on three things: your profit level, a defensible reasonable salary, and your state's rules and costs. As a general framework:
- Under ~$60–80k net profit: the default LLC is usually simpler and just as cheap after costs.
- ~$80k and up, steady: the S-corp election often wins, sometimes by several thousand dollars a year.
- Highly variable income or a brand-new business: wait until profit is proven and consistent before electing.
This is genuinely a "run the numbers on your business" decision — the break-even is different for everyone. Our tax planning service models both scenarios side by side, including payroll costs and California's franchise tax, so you can see the real net savings before you file Form 2553.
Curious whether the election would pay off for you? Book a consultation and we'll build the comparison with your actual numbers.
This is general information, not tax or legal advice. Entity choice affects liability, payroll, and state taxes — talk to a CPA (and often an attorney) before electing.
Frequently asked questions
Is an LLC or S-corp better for taxes? An LLC and an S-corp can hold the same business. The tax difference comes from the S-corp election, which can reduce self-employment tax once profits are high enough — often around $80,000+ of net profit — to justify the added cost and payroll rules.
How does an S-corp save on taxes? An S-corp owner splits income into a reasonable salary (subject to payroll/self-employment tax) and remaining profit distributions (not subject to it). Only the salary portion is hit with the 15.3% Social Security and Medicare tax.
What is a reasonable salary for an S-corp owner? The IRS requires S-corp owner-employees to pay themselves reasonable compensation for their work — roughly what you'd pay someone else to do your job. Setting it too low to dodge payroll tax is a common audit trigger.
At what income does an S-corp make sense? There's no fixed line, but many owners start to come out ahead once net profit is consistently around $80,000 or more, because the self-employment tax savings exceed the extra payroll, accounting, and filing costs.
Do S-corps and LLCs both get the QBI deduction? Yes, both can qualify for the 20% qualified business income (QBI) deduction, which the One Big Beautiful Bill Act made permanent. The interaction with an S-corp salary is nuanced and worth modeling with a CPA.