LLC (default) vs LLC w/ S-Corp Election
Once a single-member LLC earns more than roughly $40–60K in net profit, electing S-Corp tax status can save thousands per year on self-employment tax. But the election adds payroll, accounting and IRS compliance costs that can wipe out the savings at lower income levels.
| Factor | LLC (default) | LLC w/ S-Corp Election |
|---|---|---|
| Self-employment tax | 15.3% on ALL net profit | 15.3% only on "reasonable salary" portion |
| Payroll setup required | No | Yes (W2 to yourself) |
| Bookkeeping complexity | Low (Schedule C) | High (separate 1120-S return) |
| Owner draws | Flexible — take cash anytime | Regular payroll + distributions |
| Annual extra cost | $0 | ~$1,500–$3,500 (payroll service + tax prep) |
| Audit risk | Standard | Higher (IRS scrutinizes "reasonable salary") |
| Break-even net profit | Always best below ~$40K | Usually wins above ~$60–80K |
Choose LLC (default) when…
Net profit is below $40K, or your business income fluctuates wildly year-to-year, or you do not want the administrative overhead of running payroll on yourself.
Choose LLC w/ S-Corp Election when…
You consistently net more than $60–80K, can set a defensible "reasonable salary" (~40–60% of profit), and are willing to pay ~$2,000/yr for a payroll service plus an accountant who files the 1120-S.
Run the numbers for your situation
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Open the calculator →Frequently asked questions
What is a "reasonable salary" for an S-Corp owner?
The IRS expects the salary to match what a non-owner employee would earn for the same work. As a rule of thumb, 40–60% of net profit is defensible for most service businesses. Document your reasoning — geographic median, role-specific surveys, prior W2 history.
How much can I save with the S-Corp election?
At $100K net profit and a $50K reasonable salary, you save 15.3% × $50K = $7,650 in self-employment tax minus ~$2,000–$3,000 in S-Corp compliance costs. Net savings: ~$5,000/year. At $200K, the savings widen significantly.
Can I switch from LLC to S-Corp later?
Yes. File IRS Form 2553 — for the current tax year you must file within 75 days of the year start (or business formation). The election is reversible but you should not flip-flop annually.