The LLC and S-Corp serve different tax functions, and the distinction matters most at the self-employment tax line. A single-member LLC is a disregarded entity for federal tax purposes. All net profit flows to Schedule C and gets hit with 15.3% SE tax (Social Security at 12.4% + Medicare at 2.9%). An S-Corp election, filed via IRS Form 2553, changes how that profit is taxed by splitting it into W-2 salary and shareholder distributions.
The salary portion still carries payroll taxes. The distribution portion does not. That split is where the savings originate, and why the S-Corp election becomes relevant once net income crosses a specific threshold.
What Is the S-Corp Election?
When you're a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on all of your net business income. That breaks down to Social Security (12.4%) and Medicare (2.9%), covering both the employer and employee portions.
An S-Corporation (S-Corp) changes the math. Instead of paying SE tax on all your business profit, you split your income into two parts: a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax).
Side-by-Side Tax Comparison
Compare the taxes on $80,000 net profit as a sole proprietor vs. an S-Corp:
| Item | Sole Proprietor/LLC | S-Corp (with $40K salary) |
|---|---|---|
| Net Business Profit | $80,000 | $40,000 (salary) + $40,000 (distribution) |
| SE/Payroll Tax (15.3%) | $11,304 | $5,652 |
| Extra S-Corp Costs | $0 | $1,500–$2,000 |
| Net Savings | — | $4,652–$5,152 |
The $60K Rule (The Threshold)
Most CPAs agree: S-Corp election makes financial sense once your net business income exceeds $60,000–$80,000. Below that, the additional costs (payroll processing, state filing fees, tax preparation) eat up most of the tax savings.
📊 See Your Exact S-Corp Savings
Enter your net profit, and the calculator shows exactly how much you'd save by electing S-Corp status — including all costs.
Open S-Corp Savings Calculator →What Happens Between LLC and S-Corp?
This is where most advice gets it wrong. Some people say "you must file articles of incorporation" — yes, technically, but the path is simpler than most think:
- LLC: Most common entry structure. You file Schedule C and Schedule SE with your personal tax return. Simple. Cheap. You pay SE tax on all profit.
- S-Corp Election: You file Form 2553 with the IRS. You pay yourself a reasonable W-2 salary. You take the remaining profit as distributions. Distributions avoid self-employment tax. You file an additional Form 1120-S corporate return.
The S-Corp requires more paperwork. The extra cost is roughly $1,000-$2,000 per year for payroll processing, state fees, and additional tax return preparation.
Real Examples: How Much People Actually Save
| Net Income | Sole Prop SE Tax | S-Corp SE Tax | Savings (After Costs) |
|---|---|---|---|
| $50,000 | $7,065 | $5,652 | —$587 (worse) |
| $80,000 | $11,304 | $5,652 | $4,652 profit |
| $120,000 | $16,956 | $7,078 | $8,878 profit |
| $200,000 | $26,447 | $10,594 | $14,853 profit |
The higher your income, the more dramatic the savings. Above $80K, S-Corp is almost always worth it. Above $120K, it's a no-brainer.
FAQ
At $80K net profit, an S-Corp saves roughly $4,500–$5,000 per year in taxes after accounting for additional costs. At $120K, savings exceed $8,800. The break-even point is around $60K–$80K where the savings justify the extra administrative costs.
Additional costs: payroll processing ($600–$1,200/yr), state filing fees (varies, $800/yr in California), corporate tax return preparation ($500–$1,500/yr), and more complex bookkeeping. You must also pay yourself a "reasonable salary" which the IRS scrutinizes.
Yes. File Form 2553 with the IRS. You must file within 75 days of the desired effective date or by March 15 of the current tax year. Many CPAs recommend starting S-Corp at the beginning of a tax year for simplicity.
Quick Answer
An LLC vs S-Corp decision comes down to one number: net income above $60K–$80K makes S-Corp worth it. Below that, the extra costs eat up the savings. At $80K, you save ~$5,000/yr in taxes. At $120K, ~$8,800. Use the BizCalcLab S-Corp Tax Savings Calculator to see your exact numbers.