LLC vs. S-Corp: Which One Saves You More in Taxes?

Thinking about starting a business or switching your structure? The right choice can mean thousands in tax savings—but pick wrong, and you could overpay the IRS.

Choosing between an LLC and an S-Corp is one of the most important financial decisions for business owners. Both offer liability protection, but they differ significantly in tax treatment, self-employment taxes, and payroll requirements. Let’s break it all down so you can pick the structure that maximizes your tax savings.

1. What’s the Difference Between an LLC and an S-Corp?

Feature	LLC	S-Corp
Ownership	Unlimited members	Limited to 100 shareholders
Taxation	Pass-through (default)	Pass-through, but avoids some self-employment tax
Self-Employment Taxes	100% on all net income	Only on salary, not distributions
Payroll Required?	No	Yes (must take “reasonable salary”)
Corporate Formalities	Minimal	More structured (annual meetings, minutes)

📌 Key Takeaway: LLCs offer simplicity, while S-Corps can provide tax savings on self-employment tax if structured properly.

2. How Are LLCs Taxed?

By default, LLCs are pass-through entities, meaning profits flow to the owners and are taxed on their personal returns.

✅ Single-Member LLC: Taxed like a sole proprietorship. Profits are subject to income tax + 15.3% self-employment tax.✅ Multi-Member LLC: Treated like a partnership, with each member taxed on their share of income.✅ LLC Electing S-Corp Status: Can file Form 2553 to be taxed as an S-Corp (more on this below).

🚀 Best for: Small business owners who prefer simplicity and aren’t making enough to justify payroll.

3. How Are S-Corps Taxed?

S-Corporations are also pass-through entities, but with one big tax-saving advantage: Only your salary is subject to self-employment tax; distributions are not.

✅ Example: If your business earns $100,000, and you pay yourself a $50,000 salary, only that salary is subject to 15.3% self-employment tax. The remaining $50,000 taken as distributions is not subject to self-employment tax, potentially saving you thousands.

📌 Pro Tip: The IRS requires you to pay yourself a reasonable salary—you can’t just take all income as distributions to avoid taxes.

🚀 Best for: Business owners earning $50,000+ net profit who want to save on self-employment taxes.

4. Tax Savings Example: LLC vs. S-Corp

Income	LLC (Default)	S-Corp
Business Income	$100,000	$100,000
Owner’s Salary	N/A	$50,000
Self-Employment Tax (15.3%)	$15,300	$7,650 (only on salary)
Tax Savings	$0	$7,650

📌 Key Takeaway: S-Corp owners can save thousands on self-employment tax, but must run payroll and file extra paperwork.

5. How to Elect S-Corp Status for an LLC

If you already have an LLC and want S-Corp tax benefits, you can elect S-Corp status with the IRS.

✅ Step 1: Ensure your LLC has one owner or qualifies as a small business corporation.✅ Step 2: File IRS Form 2553 within 75 days of forming your business or by March 15 for the current tax year.✅ Step 3: Set up payroll and pay yourself a reasonable salary.✅ Step 4: File an S-Corp tax return (Form 1120-S) each year.

🚀 Pro Tip: Consider an S-Corp once your net income exceeds $50,000—that’s when tax savings often outweigh extra payroll costs.

6. Common LLC vs. S-Corp Mistakes to Avoid

🚫 Electing S-Corp status too soon – If your business isn’t making much profit, payroll costs may cancel out tax savings.🚫 Paying yourself too little as an S-Corp owner – The IRS can penalize you for unreasonable compensation.🚫 Not keeping corporate records – S-Corps require annual meetings and minutes to maintain status.🚫 Assuming an LLC can’t be taxed as an S-Corp – LLCs can elect S-Corp taxation while keeping LLC flexibility.

Final Thoughts: Which Is Best for You?

✅ Choose an LLC if: You’re a new or low-income business owner who wants simplicity.✅ Choose an S-Corp if: You make $50,000+ net profit and want to save on self-employment tax.

📌 Need help deciding? Let’s make sure you’re structured for maximum tax savings—https://www.glavinicfs.com/bookandrew.