S-Corp vs. LLC: Which Saves You More on Taxes?
A detailed comparison of S-Corporation and LLC tax treatment, self-employment tax savings, and when to make the switch.
This article is provided for general informational purposes by Eugene Solutions LLC. For personalized tax advice specific to your situation, please schedule a consultation with one of our licensed tax professionals.
In This Article
- 1. Understanding the Basics: LLC vs. S-Corporation
- 2. The Self-Employment Tax Advantage of S-Corps
- 3. When Does S-Corp Election Make Sense?
- 4. The Compliance Cost of S-Corp Status
- 5. The QBI Deduction: A Game-Changer for Both
- 6. Real-World Comparison: Side-by-Side Numbers
- 7. Making the Switch: How and When to Elect S-Corp
Understanding the Basics: LLC vs. S-Corporation
When entrepreneurs form a business entity, the two most popular choices are the LLC (Limited Liability Company) and the S-Corporation. Both provide personal liability protection, separating your business debts from your personal assets. However, their tax treatment differs significantly. An LLC is a state-level legal entity that, by default, is taxed as a sole proprietorship (single-member) or partnership (multi-member) — all income passes through to your personal tax return. An S-Corp is a tax election (filed via IRS Form 2553) that can be applied to either an LLC or a corporation. The key difference lies in how self-employment tax is applied to your income.
The Self-Employment Tax Advantage of S-Corps
This is where S-Corps shine. As an LLC owner, all your net business income is subject to self-employment tax (15.3% on the first $168,600, then 2.9% Medicare on amounts above). As an S-Corp shareholder-employee, you pay yourself a "reasonable salary" (subject to payroll taxes), and any remaining profit is distributed as a shareholder distribution — which is NOT subject to self-employment tax. Example: Your business earns $120,000 net profit. As an LLC, you'd pay approximately $16,956 in self-employment tax (after the above-the-line deduction). As an S-Corp paying yourself a $60,000 salary, you'd pay about $9,180 in payroll taxes — saving approximately $7,776 per year. That's real money.
When Does S-Corp Election Make Sense?
The S-Corp election generally makes financial sense when your net business income consistently exceeds $50,000–$60,000 annually. Below that threshold, the additional costs of S-Corp compliance (payroll processing, quarterly 941 filings, W-2 issuance, potentially higher accounting fees) may offset the tax savings. Other factors to consider: you must pay yourself a "reasonable salary" — the IRS scrutinizes S-Corp owners who pay themselves below-market wages to minimize payroll taxes. The salary must be comparable to what you'd pay someone else to do the same work. Eugene Solutions helps clients determine the optimal salary level that maximizes savings while staying compliant.
The Compliance Cost of S-Corp Status
S-Corps come with additional administrative requirements: you must run payroll (monthly or semi-monthly) and withhold employment taxes, file quarterly payroll tax returns (Form 941) and annual returns (Form 940), issue W-2s to shareholder-employees by January 31, file Form 1120-S (S-Corp tax return) by March 15, issue Schedule K-1 to all shareholders, and maintain corporate formalities (minutes, resolutions). These requirements add approximately $1,500–$3,000 annually in accounting and payroll costs. If your tax savings exceed this amount, the S-Corp election is worthwhile. Eugene Solutions provides full payroll and S-Corp compliance services to make this seamless.
The QBI Deduction: A Game-Changer for Both
The Qualified Business Income (QBI) deduction under IRC Section 199A allows eligible pass-through business owners to deduct up to 20% of their qualified business income. This applies to both LLCs and S-Corps. For 2025, the income thresholds are approximately $191,950 (single) and $383,900 (married filing jointly) — below these thresholds, the deduction is generally available in full. Above these thresholds, limitations based on W-2 wages and/or property apply. Here's where it gets interesting for S-Corp owners: the W-2 wages you pay yourself count toward the QBI wage limitation, which can actually increase your QBI deduction at higher income levels. This interaction is complex and is exactly the kind of optimization Eugene Solutions specializes in.
Real-World Comparison: Side-by-Side Numbers
Let's compare a freelance consultant earning $150,000 net profit under both structures. LLC (Schedule C): Net income $150,000, SE tax (before deduction) ~$21,194, QBI deduction ~$25,761 (20% of qualified income), total federal tax approximately $25,000–$30,000. S-Corp ($70,000 salary, $80,000 distribution): Payroll taxes on salary ~$10,710, QBI deduction on K-1 income ~$16,000, no SE tax on $80,000 distribution, total federal tax approximately $20,000–$24,000. Net savings with S-Corp: approximately $5,000–$7,000 per year. Over 10 years, that's $50,000–$70,000 in tax savings — enough to fund a retirement account or reinvest in your business.
Making the Switch: How and When to Elect S-Corp
To elect S-Corp status, file IRS Form 2553 by March 15 of the tax year you want the election to take effect (or within 75 days of forming the entity). Late elections may be accepted with reasonable cause. Requirements: the entity must be a domestic corporation or LLC, have no more than 100 shareholders, have only one class of stock, and all shareholders must be U.S. citizens or residents. If you miss the deadline, you can still elect for the following year. Eugene Solutions handles the entire S-Corp election process, including payroll setup, reasonable salary determination, and quarterly compliance.
Key Takeaways
- S-Corps save money by avoiding self-employment tax on distributions
- Tax savings typically kick in at $50K–$60K+ net business income
- S-Corp owners must pay themselves a 'reasonable salary' — IRS watches this closely
- Additional compliance costs run $1,500–$3,000/year — savings must exceed this
- QBI deduction (20%) applies to both LLCs and S-Corps — but interacts differently
- A $150K earner can save $5,000–$7,000/year switching from LLC to S-Corp
- File Form 2553 by March 15 of the election year
Ready to Take Action?
Wondering if S-Corp election is right for you? Schedule a free entity analysis with Eugene Solutions.
Our team of PTIN-verified, IRS-authorized tax professionals publishes weekly insights to help individuals and businesses navigate the tax code. Serving all 50 states virtually with physical offices in the Southeast.
IRS Circular 230 Disclosure: Eugene Solutions LLC provides this content for general informational purposes. It does not constitute tax, legal, or accounting advice. Individual tax situations vary. Consult a qualified tax professional for advice specific to your circumstances. Eugene Solutions LLC is subject to IRS Circular 230 professional standards.
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