Is an S-corp a different business than an LLC?

No. 'S-corp' is a federal tax election (IRS Form 2553), not a legal entity. You keep your LLC and ask the IRS to tax it as an S-corporation. The legal structure, liability protection, and state filing stay the same.

At what profit does an S-corp election make sense?

As a rough rule of thumb, once your LLC's net profit is consistently around $40,000–$50,000 or more, the self-employment-tax savings tend to exceed the added cost of running payroll and filing a separate 1120-S return. Below that, the extra cost often cancels the benefit.

What is a 'reasonable salary'?

The IRS requires S-corp owner-employees to pay themselves a reasonable salary for the work they do (subject to payroll taxes) before taking the remaining profit as distributions. Paying an unreasonably low salary to dodge payroll tax is a common audit trigger.

LLC vs S-corp: How the Tax Savings Actually Work (2026)

An S-corp is not a different company — it’s a tax election you apply to your existing LLC. It can save real money on self-employment tax once you’re profitable, but it adds payroll and accounting work, so it only pays off above a certain profit level. Here’s the mechanism, with numbers.

How a default LLC is taxed

A single-member LLC is taxed as a “disregarded entity”: all net profit flows to your personal return and is hit with 15.3% self-employment tax (12.4% Social Security + 2.9% Medicare) on top of regular income tax. On $80,000 of profit, that’s about $11,300 in self-employment tax alone (the deductible-half and Social Security wage base nuances aside).

How the S-corp election changes it

With an S-corp election, you split profit into two buckets:

A reasonable salary — runs through payroll and is subject to the 15.3% payroll tax.
Distributions — the remaining profit, which is not subject to Social Security/Medicare tax.

You save ~15.3% on whatever you legitimately take as distributions instead of salary.

A worked example ($80,000 net profit)

	Default LLC	LLC taxed as S-corp
Reasonable salary	—	$50,000
Distributions	—	$30,000
Payroll/SE tax (15.3%)	~$11,300 (on full profit)	~$7,650 (salary only)
Approx. SE-tax saving	—	~$3,650
Extra cost (payroll + 1120-S)	$0	~$1,000–$2,000

Net benefit here is roughly $1,500–$2,600/year — and it grows as profit rises. Try your own numbers in the S-corp vs LLC calculator.

The catch: extra cost and rules

You must run payroll for your salary (a service is ~$40–$80/month).
You file a separate Form 1120-S business return (accountant cost).
The salary must be reasonable for your role — too-low salaries are an audit red flag.
Some states add an S-corp tax or fee (e.g., California’s 1.5% franchise tax on S-corps).

When it pays off

Because the extra cost is fairly fixed (~$1,000–$2,000/yr), the election makes sense once your profit is high enough for the 15.3% saving to clear that hurdle — typically around $40,000–$50,000+ of net profit. Below that, stay a default LLC.

None of this changes your formation cost — see how much an LLC costs in 2026 and your state’s specific fees. This article is general information, not tax advice; confirm with a CPA.