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

Step 1: The basic difference

An LLC (Limited Liability Company) is a legal entity that separates your business and personal finances.
By default, a single-member LLC is taxed like a sole proprietor, meaning all profits are subject to self-employment tax (Social Security + Medicare).

An S-Corporation isn’t a different company type—it’s a tax status you can choose for your LLC (or corporation).
When you elect S-Corp status with the IRS, part of your income is treated as salary (subject to payroll tax) and part as distribution (not subject to payroll tax).

Step 2: Example 1 — Freelancer earning $60,000

Jordan is a web designer who operates alone.

Item	LLC (default)	LLC taxed as S-Corp
Net profit	$60,000	$60,000
Salary to owner	—	$40,000
Remaining profit (distribution)	—	$20,000
Self-employment / payroll tax owed	≈ $9,180 (15.3 %)	≈ $6,120 (on $40k salary)
Admin costs (payroll + tax filing)	$0 – $600	≈ $1,000 – $1,200

Result: The S-Corp version saves roughly $2,000 – $2,500 in taxes after extra paperwork.
That benefit grows if profits rise above $70,000 – $80,000 per year.

Step 3: Example 2 — Small restaurant earning $200,000

A local café owner has $200,000 net profit after expenses.

Item	LLC (default)	LLC taxed as S-Corp
Owner salary	—	$90,000
Distributions	—	$110,000
Payroll taxes (Social Security + Medicare)	$30,600 (15.3 % × $200k)	$13,770 (15.3 % × $90k)
Accounting + payroll costs	$0 – $1,000	$2,000 – $3,000
Estimated tax savings	—	≈ $14,000 – $15,000 net after costs

Result: At higher profit levels, the S-Corp election can meaningfully increase take-home income.

Step 4: When each option fits best

Situation	LLC (default) may fit	S-Corp election may fit
Profit under $60 K per year	✅ Simpler, low cost	❌ Savings minimal
Profit over $70 K – $80 K	⚙️ Possible upgrade later	✅ Tax efficient
Few or no employees	✅	✅
Expecting growth soon	✅ (start simple)	✅ transition later
Irregular income	✅ flexible filing	❌ requires regular payroll

Step 5: How to make the change

Form your LLC with your state.
Apply for an EIN if you don’t have one.
File IRS Form 2553 to elect S-Corp taxation (within 75 days of formation or next tax year).
Start paying yourself a “reasonable salary” through payroll.
File quarterly payroll reports and annual W-2.

Form an LLC or elect S-Corp status through LegalZoom

Step 6: Real-world checklist

💼 Track all business income and expenses with accounting software.
🧾 Set aside taxes for salary and distributions separately.
💸 Re-evaluate each year—tax savings change as profits grow.

Manage your books and payroll accurately with QuickBooks

FAQs

Do I need an accountant to file as an S-Corp?
It’s highly recommended. Payroll, quarterly filings, and IRS Form 1120-S can be complex.

Can I start as an LLC and switch later?
Yes—many owners do this once profits are steady.

Does an S-Corp affect my legal protection?
No. Liability protection comes from the LLC itself, not the tax election.