LLC vs S-corp: at what profit does the election actually save money?
Short answer
The S-corp election starts saving money at roughly $60,000–$80,000 of annual net profit. Below that, payroll processing and the extra tax return typically cost more than the self-employment tax you avoid on distributions.
Option A
LLC (default taxation)
Single-member LLC taxed as a sole proprietorship; all profit hits Schedule C.
Strengths
- No payroll to run, no W-2 to file, no reasonable-salary analysis
- Cheapest possible compliance: one Schedule C on your 1040
- Full flexibility to draw money whenever you want
- Qualifies for the QBI deduction the same as an S-corp
Trade-offs
- All net profit is subject to 15.3% self-employment tax
- No mechanism to split income between wages and distributions
- Retirement contribution limits are calculated on a less favourable base
Option B
S-corp election
LLC electing S-corp status; you pay yourself a salary and take the rest as distributions.
Strengths
- Distributions escape the 15.3% self-employment tax
- Savings scale with profit — often $6k–$15k/year at $150k+
- Solo 401(k) employer contributions can be structured favourably
- Cleaner separation between owner comp and business profit
Trade-offs
- Payroll service, quarterly filings, and an 1120-S: $1,600–$3,500/year
- The IRS requires a defensible 'reasonable salary'
- Less flexibility — you can't just move money without payroll
- State-level S-corp taxes and fees apply in several states
Head-to-head
| Metric | LLC (default taxation) | S-corp election |
|---|---|---|
| Self-employment tax baseB | 100% of net profit | Salary only |
| Annual compliance costA | $300–$800 | $1,600–$3,500 |
| Savings at $75k profitB | baseline | ~$700–$1,400 net |
| Savings at $150k profitB | baseline | ~$5,500–$8,000 net |
| Audit surfaceA | Low | Reasonable-salary scrutiny |
| Admin burdenA | Minimal | Monthly payroll cycle |
Badge marks which option wins that row: A = LLC (default taxation), B = S-corp election.
Break-even is near $60,000 of profit, and the election is clearly worth it above $100,000.
The savings equal 15.3% of whatever you classify as distribution rather than salary. At $75,000 profit with a $50,000 reasonable salary, $25,000 avoids SE tax — about $3,825 saved against roughly $2,400–$3,000 of added cost, so the net is a few hundred dollars. At $150,000 with a $85,000 salary, $65,000 avoids SE tax — roughly $9,945 saved against the same fixed costs, netting $6,500–$8,300. Below about $50,000 the election reliably loses money.
Worked example: $140,000 net profit, single-member service business
- LLC default: SE tax on 92.35% of $140,000 = $129,290 × 15.3% = $19,781
- S-corp: reasonable salary $80,000 → payroll taxes $12,240
- Distributions of $60,000 pay no SE tax
- Payroll tax saving = $19,781 − $12,240 = $7,541
- Added costs: payroll service $780 + S-corp return $1,600 = $2,380
- Net saving = $7,541 − $2,380 = $5,161
About $5,161 a year in the S-corp's favour — real money, but it depends entirely on the salary being defensible for the role and market.
The verdict
Choose LLC (default taxation)
Stay a default LLC below roughly $60,000 of net profit, or while income is volatile year to year.
Choose S-corp election
Elect S-corp above about $80,000 of stable net profit, with a CPA setting the reasonable salary.
Or run both
You can elect S-corp status later — the LLC entity doesn't change, only the tax treatment.
Frequently asked questions
What counts as a reasonable salary?
What you'd pay someone else to do your job, benchmarked to BLS or industry survey data for your role and region. Common practice puts it at 40–60% of net profit for service businesses.
Does the S-corp election affect the QBI deduction?
Yes, in both directions. Wages reduce QBI-eligible income but also help satisfy the wage limitation for higher earners. Above the income thresholds this needs modelling, not a rule of thumb.
Can I revoke the election if it stops making sense?
Yes, but the IRS generally bars re-electing S-corp status for five years afterwards, so treat the decision as multi-year.
Methodology
Uses 2026 federal self-employment and FICA rates and typical US payroll-service and CPA pricing. State franchise taxes, state S-corp taxes, and QBI phase-outs are excluded and can change the outcome. This is not tax advice — confirm with a CPA.
Run your own numbers
- LLC vs S-Corp Tax Calculator
- Self-Employment Tax Calculator
- Quarterly Estimated Tax Calculator
- All revenue answers
More business models comparisons
- Franchise vs independent business: which returns more on your capital?
- Buying a business vs starting one: which reaches income faster?
- Food truck vs restaurant: which one actually clears more profit?
- Laundromat vs car wash: which semi-passive business returns more?
- Airbnb vs long-term rental: which earns more on the same property?
- Vending machines vs ATMs: which route business makes more per machine?
Last updated 2026-08-12. Machine-readable version: /api/public/comparisons.json. Free to cite with attribution to RevenueLab.