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

Introduction

Choosing between an LLC and an S-Corp can have a huge impact on how much you pay in taxes as a business owner. If you're self-employed or running a small business, understanding the differences can save you thousands. But which one is right for you? In this guide, we'll break down the tax benefits, costs, and legal protections of both structures so you can make the best decision for your business.

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

An LLC (Limited Liability Company) is a flexible business structure that protects personal assets and allows for simple tax filing. An S-Corp (S-Corporation) is not a separate business entity, but a tax election that LLCs and corporations can apply for to lower self-employment taxes.

Feature	LLC	S-Corp
Legal Structure	Business entity	Tax election (applies to an LLC or Corporation)
Self-Employment Taxes	Paid on all net profits	Paid only on salary, reducing taxes
Pass-Through Taxation	✅ Yes	✅ Yes
Payroll Required	❌ No	✅ Yes, for owners
IRS Scrutiny	Low	Moderate (due to "reasonable salary" rule)

✅ Both offer liability protection, meaning your personal assets are protected from business debts.

Tax Savings: LLC vs. S-Corp

How LLCs Pay Taxes

By default, LLC owners (single-member or multi-member) pay self-employment tax on all business profits.

• Self-Employment Tax Rate: 15.3% (Social Security + Medicare)

• Example: If your LLC makes $100,000, you owe $15,300 in self-employment taxes + income tax.

How S-Corps Pay Taxes

S-Corp owners pay themselves a salary and take additional profits as distributions, which are not subject to self-employment tax.

• Example: If your S-Corp makes $100,000, and you pay yourself a "reasonable salary" of $50,000, you only pay self-employment tax on your salary—not the remaining $50,000.

• Potential Savings: $7,650 or more in tax savings compared to an LLC.

💡 S-Corps can significantly reduce self-employment taxes if structured correctly!

When to Choose an S-Corp Over an LLC

✅ Best for:✔ Business owners making at least $50,000+ per year✔ Those who don’t need to reinvest all profits back into the business✔ Anyone willing to handle payroll & IRS compliance

❌ Not Ideal for:✘ Side hustlers making less than $40,000 per year✘ Business owners who want a simple setup with minimal paperwork✘ High-risk industries that need to reinvest profits instead of taking distributions

💡 If your business is growing and you want to reduce your tax burden, an S-Corp may be a smart move!

How to Switch from an LLC to an S-Corp

1️⃣ Form an LLC (if you haven’t already).2️⃣ File Form 2553 with the IRS to elect S-Corp taxation.3️⃣ Set up payroll and pay yourself a reasonable salary.4️⃣ Keep good records to separate salary vs. distributions.

Final Verdict: Which Saves More on Taxes?

For most small business owners earning over $50,000, an S-Corp can save thousands in self-employment taxes. However, LLCs offer more flexibility with fewer IRS rules.

Still not sure which one is right for you? Consult with a tax professional to determine the best structure for your business!

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"Confused about LLC vs. S-Corp? This guide breaks down the tax savings, pros & cons, and best choice for your business so you can keep more of your hard-earned money."

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