An LLC and an S-corp are not two versions of the same thing, and that is where most of the tax confusion starts. An LLC is a legal structure. An S-corp is a tax election. Your LLC can keep its legal protections and still choose to be taxed as an S-corp, and that single election is where the real tax difference lives. It comes down to one thing: how much of your profit gets hit with self-employment tax.
If you run a profitable business and take all of your income as owner draws, you are almost certainly paying more self-employment tax than you need to. Here is how the two tax treatments actually compare, and the profit level where an S-corp election starts to pay for itself.
LLC vs S-corp: a legal structure and a tax election, not a either/or
People search “LLC vs S-corp” as if they have to pick one. In practice, many small businesses are both. You form an LLC with your state for liability protection, then you file a small form with the IRS to have that LLC taxed as an S-corp.
By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership. Either way, the business itself pays no income tax. The profit passes through to your personal return, and all of it is subject to self-employment tax. Electing S-corp status changes that default. It does not change your legal entity, your bank accounts, or your operating agreement.
How an LLC is taxed by default
With a default LLC, every dollar of net profit is treated as your earnings from self-employment. That profit is subject to 15.3% self-employment tax (12.4% for Social Security up to the annual wage base, which the SSA set at $176,100 for 2025, plus 2.9% for Medicare with no cap), on top of your regular income tax. Source: IRS, Self-Employment Tax, 2025.
On $150,000 of net profit, that self-employment tax alone runs into five figures before you have paid a dollar of income tax. For a service business with low overhead and healthy margins, that is the number an S-corp election is built to lower.
How S-corp taxation changes the math
When your LLC is taxed as an S-corp, you split your income into two buckets. You pay yourself a reasonable salary through payroll, and you take the rest as distributions. The salary is subject to payroll taxes (the same 15.3%, split between you and your company). The distributions are not subject to self-employment or payroll tax at all.
That is the entire savings mechanism. The more of your profit that legitimately falls into distributions rather than salary, the less you pay in Social Security and Medicare tax. The catch is the word “reasonable,” which the IRS watches closely and which we cover below.
A simplified example. On $150,000 of profit, a default LLC owner pays self-employment tax on the full $150,000. As an S-corp, an owner paying a $70,000 reasonable salary pays payroll tax on $70,000 and takes $80,000 as distributions with no self-employment tax. The tax saved on that $80,000 is the win, and it recurs every year.
LLC vs S-corp taxation, side by side
The table below compares the same LLC under its default tax treatment and after an S-corp election.
| Factor | LLC (default) | LLC taxed as S-corp |
|---|---|---|
| Legal entity | LLC | LLC (unchanged) |
| Self-employment tax | On all net profit | On the salary only |
| Owner pay | Owner draws | Reasonable salary + distributions |
| Payroll required | No | Yes |
| Tax return | Schedule C or Form 1065 | Form 1120-S |
| QBI deduction eligible | Yes | Yes |
| Best fit | Lower or uneven profit | Steady profit above roughly $70K-$80K |
Both structures still qualify for the 20% qualified business income (QBI) deduction under Section 199A, subject to income thresholds. Source: IRS, Section 199A. The deciding factor between them is almost always the self-employment tax line.
Not sure which side of that table you belong on? A quick review of your numbers gives you a clear answer. See how Exact’s business tax services model the S-corp decision for you.
Is an LLC or S-corp better for taxes?
An S-corp is usually better for taxes once your business earns steady profit above roughly $70,000 to $80,000, because it removes self-employment tax from the distribution portion of your income. Below that level, a default LLC is often simpler and nearly as tax-efficient.
The election makes sense when these hold true:
- Net profit is consistent and above the salary you would reasonably pay yourself
- You can support a defensible reasonable salary for your role
- The annual savings clear the added cost of payroll and a separate tax return
- Your state does not claw the savings back with a heavy S-corp or franchise tax
The costs and catches of an S-corp election
The savings are real, but so are the obligations. You have to run formal payroll, which means a payroll provider, quarterly filings, and W-2s. You file a separate business return (Form 1120-S) in addition to your personal return. And your salary has to be reasonable for the work you do. Pay yourself an artificially low salary to dodge payroll tax and you invite the IRS to reclassify your distributions as wages, with back taxes and penalties.
Some states also tax S-corps directly. California, for example, charges a 1.5% franchise tax on S-corp net income with an $800 annual minimum, which shrinks the federal savings. The election is a numbers decision, and the numbers are state-specific.
Frequently asked questions
Can an LLC be taxed as an S-corp?
Yes. An LLC elects S-corp taxation by filing Form 2553 with the IRS (and Form 8832 in some cases). The LLC stays an LLC legally; only its tax treatment changes.
How much can an S-corp actually save?
The savings equal roughly 15.3% of whatever profit you can shift from salary into distributions, minus the cost of payroll and the extra return. For a business with $150,000 in profit and a $70,000 reasonable salary, that often lands in the several-thousand-dollars-per-year range, and it repeats annually. The exact figure depends on your salary, your state, and your profit, which is why it is worth modeling before you elect. We break the mechanics down in our guide to how S-corp tax savings work.
What counts as a reasonable salary?
The IRS expects an S-corp owner-employee to be paid what a similar role would earn at arm’s length, based on your duties, experience, time in the business, and what comparable businesses pay. There is no fixed percentage. Document how you arrived at the figure.
When should I elect S-corp status?
Most owners consider it once profit is steady and comfortably above their reasonable salary. Timing matters too: the election generally needs to be filed within a set window to apply to the current tax year, so it is worth deciding before year-end rather than at filing time. A tax advisor can confirm the deadline for your situation.
The S-corp decision is one calculation you do not want to guess at. Exact’s CPAs run the numbers on your real profit, salary, and state, then handle the election and payroll if it makes sense. Talk to Exact about your business tax strategy.
About the author. This article was written by Dan Spada, CPA, at Exact Partners, a national outsourced accounting, fractional CFO, and business tax firm named No. 191 on the 2025 Inc. 5000 list of America’s fastest-growing private companies. Dan and the Exact team advise founders, franchise operators, and PE-backed businesses on entity structure and tax strategy. Learn more about Dan Spada and the Exact Partners team.
This article is general information, not tax advice for your specific situation. Tax rules change and vary by state. Confirm any election with a qualified tax advisor.
