LLC vs S-Corp: Which Business Structure Really Saves You More in Taxes?
Choosing the right business structure is one of the most important financial decisions a business owner can make. Yet many entrepreneurs form an LLC and never revisit how they are taxed. That choice alone can cost thousands in unnecessary taxes each year.
The most common question we hear is simple:
Should I stay an LLC, or should I elect S-Corp status?
The answer depends on how your business earns income and how much profit you keep.
What Is the Difference Between an LLC and an S-Corp?
An LLC is a legal business structure.
An S-Corporation is a tax election.
Most LLCs are taxed as “disregarded entities” by default. That means the IRS treats you and your business as the same. All profits pass through to your personal return, and you pay self-employment tax on the full amount.
An S-Corp works differently. When an LLC elects S-Corp status, the owner becomes both an employee and an owner of the business. This changes how taxes are calculated.
How LLCs Are Taxed
When you operate as a standard LLC:
• All business profits flow to your personal tax return
• You do not have to put yourself on payroll
• You pay self-employment tax on 100 percent of net profit
Self-employment tax is currently 15.3 percent, which covers Social Security and Medicare. That tax applies on top of your regular income tax.
How S-Corps Are Taxed
When you elect S-Corp status:
• You must pay yourself a reasonable salary
• Payroll taxes apply only to that salary
• Remaining profits are distributed without self-employment tax
This structure limits where the 15.3 percent tax applies, which is where the savings come from.
Simple Tax Savings Example
Let’s say your business earns $150,000 in profit.
As a regular LLC:
You pay approximately $23,000 in self-employment tax.
As an S-Corp:
You pay yourself a $60,000 salary.
Payroll taxes apply only to that $60,000.
The remaining $90,000 is not subject to self-employment tax.
Estimated savings: around $14,000.
When Does an S-Corp Make Sense?
An S-Corp is not right for every business.
Most CPAs recommend considering the election when net income reaches somewhere between $40,000 and $100,000 per year. The higher your profits, the more valuable the S-Corp structure becomes.
However, income alone should not drive the decision. Other factors matter, including:
• Payroll and compliance costs
• State taxes and filing requirements
• Retirement contributions
• Other sources of income
• Long-term business goals
Potential Downsides of an S-Corp
S-Corps come with added responsibilities, such as:
• Running payroll
• Filing a separate business tax return
• Paying additional accounting and payroll costs
• Following stricter IRS rules
For some businesses, the tax savings outweigh the extra work. For others, staying an LLC makes more sense.
Why This Decision Matters
Choosing the wrong tax structure can quietly cost you thousands every year. Choosing the right one can create meaningful, long-term savings.
This is not a one-size-fits-all decision. It should be made with real numbers, not assumptions.
Need Help Deciding?
At Virtual CPAs, we help business owners evaluate whether an LLC or S-Corp structure makes sense based on their actual income, expenses, and goals.