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Tax

LLC vs S Corp Taxes

Compare LLC default taxation and S Corp election — when the S Corp election saves on self-employment tax.

Overview

A standard LLC is taxed as a sole proprietorship or partnership — all profits subject to self-employment tax. Electing S Corp status (Form 2553) lets the owner take part of profits as wages and the rest as distributions, saving 15.3% SE tax on the distribution portion.

Feature
LLC (default tax)
S Corp Election
Default Tax
Sole prop / partnership
S Corp (after Form 2553 election)
Self-Employment Tax
On all net profit (15.3%)
Only on reasonable wages
Reasonable Salary
N/A
Required — IRS scrutiny if too low
Payroll Required
No
Yes — quarterly filings, W-2
Bookkeeping Complexity
Lower
Higher — payroll, separate distributions
Tax Savings Threshold
N/A
Generally $50K+ profit before it's worth it
QBI Deduction
Yes
Yes (some limits at high incomes)

Choose LLC (default tax) when...

Stick with default LLC taxation if your net profit is under ~$50K, or if your business is variable and the payroll overhead isn't worth it.

Choose S Corp Election when...

Elect S Corp status when net profit consistently exceeds ~$50K/year — the SE tax savings outweigh the bookkeeping and payroll costs.

Our Verdict

For self-employed people with consistent profits above ~$50K/year, the S Corp election usually saves money — even after payroll service costs ($500–$1,500/year). Below that threshold, the additional complexity rarely pays off. Always pay yourself a "reasonable salary" — the IRS aggressively audits owners who pay themselves zero or token wages.

Frequently Asked Questions

What is the difference between LLC (default tax) and S Corp Election?

A standard LLC is taxed as a sole proprietorship or partnership — all profits subject to self-employment tax. Electing S Corp status (Form 2553) lets the owner take part of profits as wages and the rest as distributions, saving 15.3% SE tax on the distribution portion.

When should I choose LLC (default tax) over S Corp Election?

Stick with default LLC taxation if your net profit is under ~$50K, or if your business is variable and the payroll overhead isn't worth it.

When should I choose S Corp Election over LLC (default tax)?

Elect S Corp status when net profit consistently exceeds ~$50K/year — the SE tax savings outweigh the bookkeeping and payroll costs.

Related Comparisons

LLC vs CorporationS Corp vs C CorpSole Proprietorship vs LLC

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