Should you elect S-corp status?
If you run a single-member LLC or sole proprietorship, every dollar of profit is subject to self-employment tax, roughly 15.3% (12.4% Social Security up to the annual wage base, plus 2.9% Medicare), on top of regular income tax. Electing to be taxed as an S-corporation is the most common way small business owners reduce that bill.
Here's the mechanism. As an S-corp, you become an employee of your own company and pay yourself a "reasonable salary." That salary is subject to payroll tax, but the remaining profit comes out as a distribution that is not subject to self-employment or payroll tax. The larger your profit relative to a reasonable salary, the more you save.
When an S-corp usually wins
- Your profit comfortably exceeds a reasonable salary for your role, often once net profit is in the ballpark of $60,000 to $80,000 and up, though it depends on your industry and location.
- You can justify a salary that is genuinely reasonable but leaves a meaningful distribution on top.
- You're willing to run payroll and file a separate business return, which adds cost and paperwork.
When staying an LLC is fine
- Profit is modest, so the distribution left after a reasonable salary is small and the SE-tax savings don't cover the extra accounting and payroll costs.
- You already earn wages from a W-2 job that max out Social Security, which shrinks the S-corp advantage, sometimes to nothing. Run your own numbers above to see this.
- You value simplicity and want to avoid a separate corporate return.
Don't forget the QBI deduction
The 20% qualified business income (QBI) deduction interacts with this choice. As an LLC, your QBI is based on your full net profit. As an S-corp, only the pass-through portion after your salary counts, so a very high salary can shrink your QBI deduction and eat into the SE-tax savings. The calculator above accounts for this, which is why the "best" option isn't always the obvious one.
What about a C-corp?
A C-corporation pays a flat 21% federal tax on profit after your salary. Money you then take as dividends is taxed again at capital-gains rates, so distributed profit is taxed twice. C-corps can make sense when you plan to reinvest and keep earnings inside the company, but for an owner who wants to pull most of the profit out each year, they usually cost more than an LLC or S-corp. The calculator shows all three so you can see the gap.
Reasonable salary matters
The IRS requires S-corp owners to pay themselves a reasonable salary for the work they do before taking distributions. Setting it artificially low to dodge payroll tax is a common audit trigger. A defensible salary reflects what you'd pay someone else to do your job. Try a few salary levels above to see how it changes your total.
Frequently asked questions
How much does an S-corp save vs an LLC?
It depends on your profit, your reasonable salary, and whether you have other wages. Enter your numbers above to see the exact difference. For a solo owner with $150,000 of profit and no other job, the saving is often several thousand dollars a year.
At what income does an S-corp make sense?
There's no fixed number, but the extra cost of payroll and a corporate return often starts paying off once profit is roughly $60,000 to $80,000 above a reasonable salary. Below that, the savings may not cover the added complexity.
Is an LLC or S-corp better for taxes?
An "S-corp" here is a tax election an LLC can make, not a different legal entity. For many profitable solo businesses the S-corp election lowers total tax by avoiding self-employment tax on distributions, but it isn't automatic, run your own numbers above.
Does an S-corp reduce the QBI deduction?
It can. QBI is based on your pass-through income after salary, so paying yourself a high salary lowers the QBI deduction. The calculator factors this in.