1. LLC vs S-Corp Quick Comparison

Choosing between an LLC taxed as a sole proprietorship and an LLC taxed as an S-Corp can significantly impact your taxes. Here is an overview of the key differences.

Feature LLC Default Taxation S-Corp Election
Tax Classification Sole proprietorship (single) or Partnership (multi-member) S-Corporation
Self-Employment Tax On 100% of net profit Only on reasonable salary
Payroll Requirements No payroll required Yes, owner must run payroll
Compliance & Reporting Minimal (Schedule C) More (payroll, forms, rules)
Best For Lower profit or simple setup Higher profit and active owners

2. How an LLC Is Taxed by Default

Definition: Pass-through Taxation

Pass-through taxation means business profits generally pass through to the owner's personal tax return rather than being taxed at the entity level. This avoids double taxation but means all profits are subject to self-employment tax.

By default, a single-member LLC is treated as a "disregarded entity" for tax purposes. This means the IRS ignores the LLC and taxes you as if you were a sole proprietor. All net business profit flows to Schedule C on your personal return, and you pay:

  • Federal income tax at your marginal rate
  • Self-employment tax of 15.3% on net earnings (up to the Social Security wage base) — covering both the employee and employer share of Social Security and Medicare

A multi-member LLC defaults to partnership taxation, filing Form 1065 and issuing K-1s. The same self-employment tax rules generally apply to active members.

3. How an S-Corp Election Works

Electing S-Corp status does not change your LLC structure — you are still an LLC with all the same legal protections. Only the tax treatment changes. With an S-Corp election:

  • You must pay yourself a "reasonable salary" as an employee of your LLC
  • You pay FICA taxes (Social Security and Medicare) only on the salary portion
  • Remaining profit is distributed to you as an "owner distribution" — generally not subject to self-employment tax

4. When an S-Corp Election Can Save Money

Example: Potential Savings

If your LLC earns $100,000 in net profit and you pay yourself a reasonable $60,000 salary as an S-Corp, approximately $40,000 may be taken as an owner distribution — potentially avoiding ~$6,120 in self-employment tax on that portion. Actual savings depend on payroll costs, state rules, and filing expenses.

Important

An S-Corp election may require payroll, reasonable salary rules, and additional tax filings. It is not automatically better for every LLC. Payroll service costs and accounting fees can reduce or eliminate tax savings at lower profit levels.

5. Costs and Compliance Differences

The S-Corp election introduces real compliance costs that must be weighed against potential savings:

  • Payroll processing: $500–$2,000/year for a payroll service
  • Additional accounting/CPA fees for Form 1120-S: $500–$2,000/year
  • Quarterly payroll tax filings (Form 941)
  • State payroll registration requirements

Most tax professionals suggest the S-Corp election makes financial sense when your net profit exceeds $50,000–$80,000 per year after business expenses.

6. How to Elect S-Corp Status

  1. Your LLC must be eligible (US-based, no more than 100 shareholders, only allowable shareholder types)
  2. File IRS Form 2553 — "Election by a Small Business Corporation"
  3. File by March 15 to take effect for the current tax year (or within 75 days of forming your LLC for new businesses)
  4. Check your state's equivalent S-Corp election requirements — some states require a separate filing
Deadline Warning

Missing the Form 2553 deadline means your S-Corp election takes effect the following tax year. Late elections may be granted in some circumstances, but do not rely on this. File early.

7. Sources & References

Was this guide helpful?