“Should I become an S corp?” might be the question we hear most from business owners — usually right after a friend at a barbecue claimed it cut their taxes in half. The honest answer: sometimes it’s a significant win, sometimes it’s an expensive complication, and the difference comes down to math worth doing carefully.
First, untangle the terms
An LLC is a legal structure; an S corporation is a tax classification. They’re not competitors — in fact, the most common arrangement is an LLC that elects to be taxed as an S corporation. So the real question is usually: should my LLC keep its default tax treatment, or elect S status?
How each is taxed
By default, a single-member LLC is taxed like a sole proprietorship: all profit lands on your Schedule C, and every dollar of it is subject to both income tax and 15.3% self-employment tax.
With an S election, you become an employee of your own company. You take a reasonable salary (subject to payroll taxes) and take remaining profit as distributions — which are subject to income tax but not self-employment tax. That gap is where the savings live.
The self-employment tax math
Say your business nets $120,000. As a default LLC, roughly all of it faces the 15.3% SE tax (with some adjustments) — call it in the neighborhood of $17,000.
As an S corp paying a defensible $70,000 salary, payroll taxes apply to the salary only. The remaining $50,000 of distributions escapes the 15.3% entirely — saving roughly $7,000–$7,600 a year before the added costs below.
The S corp advantage isn’t magic — it’s the gap between your profit and a reasonable salary, times 15.3%.
Two important caveats. First, the IRS requires the salary to be reasonable for your role and industry — paying yourself $20,000 on $200,000 of profit invites exactly the audit you don’t want. Second, a lower salary can reduce future Social Security benefits and shrink how much you can contribute to retirement plans.
The costs nobody mentions
- Payroll: You’ll run real payroll, with deposits, quarterly 941s, and a W-2 — typically a payroll service subscription plus setup.
- A separate tax return: Form 1120-S, due March 15, with K-1s — more professional preparation cost.
- State quirks: Some states tax S corporations directly or charge franchise fees that dilute the benefit.
- Discipline: Clean books and a real separation between business and personal finances stop being optional.
Those costs commonly total a few thousand dollars a year. That’s why profit level matters so much: the election needs enough SE-tax savings to clear the overhead with room to spare.
When each one wins
Stay a default LLC when: profits are modest (roughly under $50,000–$60,000), income is unpredictable, or you reinvest most earnings. Simplicity is worth real money too.
Consider the S election when: profits are consistently strong, comfortably above a reasonable salary for your work, and you’re ready for payroll discipline. For many service businesses clearing six figures, the election pays for itself several times over.
How to switch
The election itself is Form 2553 — generally due within two months and 15 days of the start of the tax year you want it to take effect (late-election relief is often available). The filing is simple; the decision shouldn’t be. Model your actual numbers, both ways, including every added cost.
That modeling is exactly what we do in a business tax engagement — and if the math says “stay put,” we’ll tell you that, too. Run your numbers with us before deciding at a barbecue.
