"LLC vs S-Corp" is not a choice between entity types — it's a choice between tax elections that an LLC can make. A single-member LLC is a disregarded entity by default (taxed like a sole proprietorship); a multi-member LLC is a partnership by default. Either can elect S-Corp taxation by filing Form 2553 with the IRS. The decision hinges almost entirely on self-employment tax savings versus added compliance costs.
How LLC default taxation works
By default, LLC income flows through to owners' personal tax returns:
- Single-member LLC: All profit reported on Schedule C of your personal 1040. You pay ordinary income tax + self-employment tax (15.3%) on the entire net profit.
- Multi-member LLC: Partnership return (Form 1065) with K-1s distributed to members. Each member pays ordinary income tax + self-employment tax on their share.
Self-employment tax is the LLC's main tax disadvantage: you pay both the employee and employer portions of Social Security (12.4%) and Medicare (2.9%), totaling 15.3% on net self-employment income up to the Social Security wage base ($168,600 in 2024, indexed annually).
How S-Corp taxation changes things
An S-Corp election (filed via Form 2553) converts the LLC's tax treatment:
- You become an employee of your own company and pay yourself a "reasonable salary" via W-2 payroll.
- The salary portion is subject to FICA tax (15.3% combined employee+employer, similar to SE tax).
- Net profit above your salary flows through as a "distribution," subject to ordinary income tax but not to FICA/SE tax.
The savings: FICA/SE tax on distributions is zero. If you pay yourself $100k salary and take $100k as distributions on $200k total profit, you save 15.3% × $100k = $15,300 in FICA taxes versus the LLC default treatment.
Example math
| Scenario | LLC default | LLC with S-Corp election |
|---|---|---|
| Net business profit | $200,000 | $200,000 |
| Reasonable salary paid | N/A | $100,000 |
| Distribution | N/A | $100,000 |
| SE tax / FICA (15.3%) | ~$20,900 (capped at wage base) | ~$14,100 (on salary only, after SS cap) |
| Federal income tax | Unchanged | Unchanged |
| Payroll service cost | $0 | ~$600-1,200/yr |
| Additional tax prep | $0 | $500-1,500/yr for Form 1120-S |
| Net annual savings | — | ~$5,000-5,500 after added costs |
The "reasonable salary" requirement
S-Corp election requires paying yourself a "reasonable salary" — what you'd pay someone else to do your job. The IRS enforces this: paying yourself $20k salary and taking $180k as distributions to maximize FICA savings triggers audit risk.
Practical guidance:
- Salary should reflect market rate for your role (check Glassdoor, Indeed, Salary.com for your industry and region).
- Typical safe ratio: salary = 40-60% of total compensation, distributions = the remainder.
- Document the salary decision with reference to market data. If audited, having the basis for your salary number written down matters.
When S-Corp election pays off
The election's added costs (~$1,200-2,700 annually) must be covered by the SE/FICA savings to be net positive. A rough breakeven:
| Net business profit | Typical SE/FICA savings with S-Corp | Net after added compliance costs |
|---|---|---|
| $50,000 | ~$2,000-3,000 | Roughly breakeven, questionable |
| $75,000 | ~$3,500-4,500 | ~$2,000 net benefit |
| $100,000 | ~$5,000-6,500 | ~$3,000-4,000 net benefit |
| $150,000 | ~$7,500-9,000 | ~$5,500-6,500 net benefit |
| $250,000+ | $15,000+ (capped at wage base) | $13,000+ net benefit |
Rough rule: elect S-Corp once net business income reliably exceeds $75,000-100,000 per year. Below that, the added compliance costs can eat the savings.
The costs of electing
Required: payroll service
You must run actual payroll with tax withholding on your reasonable salary. Use Gusto, ADP, or comparable. Cost: $40-100/month = $480-1,200/year. Gusto is the most common choice for small businesses.
Required: additional tax filing
S-Corp files Form 1120-S annually (the corporate return) plus K-1s to shareholders. CPA fees for this typically $500-1,500 depending on complexity.
Required: quarterly estimated taxes
S-Corp shareholders generally pay quarterly estimated taxes on distributions (similar to LLC default). The cadence is the same; the calculation is slightly different.
Optional but advisable: CPA relationship
S-Corp election adds complexity that's hard to DIY without error. An annual CPA relationship for $1,000-2,000 typically pays for itself via correct filings + avoided penalties.
Limitations of S-Corp election
- US persons only. S-Corp requires US-citizen or US-resident-alien shareholders. Non-resident founders of US LLCs cannot elect S-Corp treatment.
- Max 100 shareholders. Not an issue for most small businesses.
- One class of stock. Limits capitalization flexibility.
- Cannot be owned by partnerships, corporations, or nonresident aliens.
The decision checklist
- Is your net business income consistently above $75,000/year? If no, don't elect.
- Are you a US person (citizen or resident alien)? If no, you can't elect.
- Are you willing to run actual payroll? If no, don't elect.
- Can you defend a reasonable salary calculation? If no, work with a CPA to document it.
- Do you have a CPA relationship or willingness to build one? If no, the election's complexity may cause problems.
FAQ
When should I file Form 2553?
Form 2553 must be filed within 75 days of the start of the tax year you want the election effective. For a new entity, file within 75 days of formation. For existing LLCs, file by mid-March to be effective for the current year.
Can I revoke the S-Corp election later?
Yes, but with restrictions. Once revoked, you can't re-elect S-Corp status for 5 years without IRS permission.
What counts as a "reasonable salary"?
What you'd pay someone else to do your job. Reference Glassdoor, Indeed, and Salary.com for your specific role and geographic area. Documentation matters for audit defense.
Is S-Corp better than C-Corp for small businesses?
For most small businesses not raising venture capital, yes. S-Corp avoids double taxation (C-Corp pays corporate tax, shareholders then pay on dividends). C-Corp makes sense for VC-backed startups and specific high-revenue scenarios with tax planning.
Do I need a new EIN when electing S-Corp?
No. The LLC keeps its existing EIN. The S-Corp election changes tax treatment, not the entity's identity.
Last verified April 2026. Tax rules subject to change; consult a US CPA for specific situations.