S-Corp vs. LLC: How the Election Actually Changes Your Taxes
Sam's List Editorial | 2026-06-27
The most common confusion here is that an LLC and an S-corp are not the same kind of thing. An LLC is a legal business structure; an S-corp is a tax election that certain businesses, including many LLCs, can choose. Making the S-corp election can reduce self-employment tax for profitable businesses, but it adds payroll requirements and only pays off above a certain income. Here is how the election actually changes your taxes, with a worked example.
Understanding the distinction is the key that unlocks the rest. You are not choosing between two structures so much as deciding whether to layer a tax election on top of your structure.
LLC: A Legal Structure
An LLC, or limited liability company, is a legal entity that separates your personal assets from the business, offering liability protection. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, meaning the profits flow through to the owners' personal returns, where they are subject to income tax and self-employment tax.
That self-employment tax, covering Social Security and Medicare, is where the S-corp election comes in.
S-Corp: A Tax Election
An S-corp is not a separate structure you form so much as a tax status you elect, available to eligible LLCs and corporations. The defining feature for tax purposes is how owner pay is treated. An S-corp owner who works in the business must pay themselves a reasonable salary, which is subject to payroll taxes, but the remaining profits can be taken as distributions that are generally not subject to self-employment tax.
That split, salary versus distributions, is the entire source of the potential savings, and also the source of the rules you have to follow.
How the Election Changes the Math
Under a default LLC, essentially all net profit is subject to self-employment tax. Under an S-corp election, only the salary portion is subject to payroll taxes, while distributions are not. For a profitable business, that can mean meaningful savings.
Here is a simplified, illustrative example. Suppose a business nets $120,000 in profit.
| Default LLC | S-corp election (illustrative) | |
|---|---|---|
| Subject to self-employment / payroll tax | ~$120,000 | Reasonable salary, e.g. ~$70,000 |
| Taken as distributions (no SE tax) | $0 | ~$50,000 |
In this illustration, the S-corp owner pays payroll taxes on the salary but not on the $50,000 of distributions, which is where the savings come from. The exact numbers depend entirely on what counts as a reasonable salary and your specific situation; this is illustrative only.
The Catches
The election is not free money. It comes with requirements and costs:
- Reasonable salary. You must pay yourself a salary that is reasonable for your role. Setting it artificially low to dodge payroll tax invites IRS scrutiny.
- Payroll and added complexity. Running payroll, filing additional returns, and the extra administration cost time and money.
- A break-even point. Because of those costs, the S-corp election generally only pays off above a certain level of profit. Below it, the savings may not justify the complexity.
When the S-Corp Election Makes Sense
It tends to favor profitable businesses where the self-employment tax savings on distributions clearly exceed the added payroll and administrative costs. The right answer depends on your profit, a defensible reasonable salary, and your willingness to handle the extra requirements, which is why this is a decision to run with a tax professional rather than a rule of thumb.
If you want help with the math for your situation, you can compare accountants and CFOs by specialty, with verified reviews, on Sam's List. Confirm credentials and fit before engaging.
Frequently Asked Questions
Is an S-corp better than an LLC? They are not directly comparable, because an LLC is a legal structure and an S-corp is a tax election an LLC can make. For a profitable business, electing S-corp status can reduce self-employment tax, but it adds payroll and administrative requirements. Whether it is "better" depends on your profit and willingness to handle the complexity.
How does an S-corp save on taxes? An S-corp owner pays themselves a reasonable salary subject to payroll taxes, while remaining profits can be taken as distributions that are generally not subject to self-employment tax. The savings come from that portion of profit escaping self-employment tax, but the salary must be reasonable for the work.
When should I elect S-corp status? Generally when your business is profitable enough that the self-employment tax savings on distributions clearly exceed the added payroll and administrative costs. There is effectively a break-even point, below which the complexity is not worth it. A tax professional can model the math for your specific income.
What is a reasonable salary for an S-corp owner? It is compensation that reflects what you would reasonably be paid for the work you do in the business, considering your role, industry, and experience. The IRS expects it to be defensible; setting it artificially low to minimize payroll tax invites scrutiny. Determining it is best done with professional guidance.