S Corporation vs. LLC: Which Structure Saves You More in Taxes?
- Marla Alvarez
- Dec 12, 2025
- 3 min read
Choosing the right business structure isn’t just a legal decision—it can have a massive impact on how much you keep in your pocket at tax time. For small and mid-size business owners, the debate often comes down to two popular options: the Limited Liability Company (LLC) and the S Corporation (S Corp).
Both offer liability protection, flexible ownership, and tax advantages compared to running a sole proprietorship, but the real question is: Which saves you more in taxes? Let’s break it down step by step.
LLC (Limited Liability Company):By default, an LLC is considered a “pass-through entity,” meaning the business doesn’t pay taxes directly. Instead, profits and losses pass through to the owner’s personal tax return. The IRS treats single-member LLCs like sole proprietorships and multi-member LLCs like partnerships.
S Corporation (S Corp):An S Corp is not a separate business entity type—it’s a tax election you make with the IRS (usually starting as an LLC or corporation). S Corps also enjoy pass-through taxation, but with one key difference: owners can classify income as salary and distributions, potentially lowering self-employment taxes.
LLCs offer simplicity. All profits are subject to self-employment taxes (Social Security and Medicare, currently 15.3%) on top of income tax.
For example:
Your LLC makes $100,000 profit.
You’ll pay income tax plus self-employment tax on the full $100,000.
This can quickly add up, especially as your business grows.
With an S Corp, you split income into:
Salary (W-2 wages): Subject to payroll taxes (Social Security and Medicare).
Distributions (dividends): Not subject to self-employment taxes.
Example:
Your S Corp makes $100,000 profit.
You pay yourself a “reasonable salary” of $60,000.
The remaining $40,000 is taken as a distribution.
Here’s the magic: only the $60,000 salary is subject to payroll taxes. The $40,000 distribution avoids self-employment tax, saving thousands.
Side-by-Side Comparison
Feature | LLC (default tax) | S Corporation |
Liability Protection | Yes | Yes |
Taxation | Entire profit subject to SE tax | Salary subject to SE tax; distributions exempt |
Owner Flexibility | Unlimited number of members | Limited to 100 U.S. shareholders |
Administrative Burden | Low | Moderate (payroll, IRS filings) |
Audit Risk | Low | Higher if salary deemed too low |
An LLC may be the better option if:
Your business is just starting and profits are modest.
You want maximum flexibility with fewer compliance requirements.
You plan to reinvest most profits back into the business.
LLCs are simpler, cheaper to maintain, and still protect your personal assets.
An S Corp becomes attractive when:
Your business earns $80,000+ in net profit annually.
You want to minimize self-employment taxes.
You’re comfortable running payroll and filing extra paperwork.
For many small to mid-size business owners, the self-employment tax savings outweigh the administrative hassle once revenue reaches a certain threshold.
The IRS keeps a close eye on S Corporations because of the temptation to pay yourself a token salary and take the rest as distributions.
If your salary is deemed unreasonably low, you could face penalties and back taxes. A general guideline:
Pay yourself what you’d reasonably pay someone else to do your job.
For example, if a market salary for your role is $70,000, you shouldn’t claim $20,000 salary and $80,000 distributions.
Let’s say your business nets $120,000 profit:
LLC (default):
Entire $120,000 subject to self-employment tax (15.3%) = $18,360
Plus federal/state income taxes.
S Corporation:
Pay yourself salary of $70,000 (payroll taxes = $10,710)
Distribute remaining $50,000 (no payroll taxes)
Savings in self-employment taxes: $7,650
That’s nearly $8,000 in your pocket, just by electing S Corporation status.
Potential Drawbacks of S Corps
While the tax savings are attractive, S Corporations come with trade-offs:
Payroll requirements: You must run payroll for yourself, even if you’re the only employee.
Extra filings: Annual IRS election (Form 2553), payroll tax returns, state filings.
Limited ownership: Only U.S. citizens/residents, capped at 100 shareholders.
Scrutiny risk: Higher chance of IRS audit if salary looks unreasonably low.
Key Takeaway
LLCs are simple, flexible, and great for early-stage or smaller profit businesses.
S Corporations often save small to mid-size business owners thousands in self-employment taxes once profits climb past a certain point.
The right choice depends on your business’s size, growth, and willingness to handle a bit more paperwork.
Final Word
Every business is different. An S Corporation can be a powerful tax-saving tool, but it must be set up and managed properly to avoid trouble with the IRS. Many owners find that consulting a tax professional before making the switch helps them maximize benefits and avoid costly mistakes. Cyfair Tax and Services can help you decide if you should elect an S Corporation and help understand the rules. Book a Call with one of our experts here.
By: Marla Alvarez
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