S Corp vs LLC: Tax Differences Explained Simply
How LLCs and S-corps differ on self-employment tax, payroll, and paperwork — and when the S-corp election actually saves you money.
An S corp isn't a business entity — it's a tax election. Any LLC or corporation can elect S-corp status with the IRS. Here's when it's worth it.
How a default LLC is taxed
All net profit is subject to self-employment tax (15.3%) on top of regular income tax. Simple, but expensive once profits get big.
How S-corp taxation works
You pay yourself a 'reasonable salary' (subject to payroll tax) and take the rest as distributions (no self-employment tax). That distribution piece is where the savings come from.
When the S-corp election makes sense
Generally once net profit consistently exceeds $40,000–$50,000 per year. Below that, payroll and accounting costs eat the savings.
The downsides
Required payroll, more bookkeeping, stricter IRS scrutiny on what counts as a 'reasonable' salary, and an extra tax return (Form 1120-S).
Start as an LLC. Elect S-corp status the year you're confident profit will clear $50K. Talk to a CPA before filing Form 2553.
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