If you’re a small business owner in the US, one of the most important financial decisions you’ll make is choosing between an S-Corporation and an LLC. The wrong choice can cost you thousands of dollars in unnecessary taxes every year. The right choice can save you just as much.
This guide breaks down exactly how each structure works, who should choose which, and how much you can realistically save.
What Is an LLC?
A Limited Liability Company (LLC) is the most common business structure for small businesses in the US. It protects your personal assets from business debts and is simple to set up. By default, a single-member LLC is taxed as a sole proprietorship — meaning all your business profit flows directly to your personal tax return and you pay self-employment tax of 15.3% on every dollar of profit.
If your business makes $100,000 in profit, you pay $15,300 in self-employment tax alone — before income tax.
What Is an S-Corp?
An S-Corporation is a tax election, not a separate business entity. You can elect S-Corp status for your LLC or corporation by filing Form 2553 with the IRS. Once approved, your business splits its profit into two parts: your salary and a distribution.
You only pay self-employment tax on your salary — not on the distribution.
The S-Corp Tax Saving — A Real Example
Let’s say your business profits are $120,000 per year.
As a standard LLC: you pay 15.3% self-employment tax on the full $120,000 = $18,360 in SE tax.
As an S-Corp with a reasonable salary of $60,000: you pay 15.3% only on the $60,000 salary = $9,180 in SE tax. The remaining $60,000 comes to you as a distribution with no SE tax.
Annual saving: $9,180. Every year.
When Does S-Corp Make Sense?
The S-Corp election makes financial sense when your net business profit is consistently above $40,000 to $50,000 per year. Below that level, the additional accounting costs — payroll processing, separate business tax return (Form 1120S), bookkeeping — can outweigh the tax savings.
Above $80,000 in annual profit, the S-Corp election almost always saves significant money.
What Are the Additional Costs of an S-Corp?
Running an S-Corp properly requires: a separate business bank account, payroll processing (even if you’re the only employee), a Form 1120S tax return each year, and clean monthly bookkeeping. These typically add $2,000 to $4,000 per year in accounting costs — which is still far less than the tax savings at higher income levels.
Which Should You Choose?
Choose LLC (default taxation) if your profit is under $40,000 per year or you’re in the early stages of building your business.
Choose S-Corp election if your profit is above $50,000 consistently and you want to reduce your self-employment tax burden immediately.
How Auxilio Can Help
At Auxilio, we prepare Form 1120S returns for S-Corp clients and handle the full bookkeeping required to support the election. We also advise on whether the S-Corp election makes sense for your specific income level before you make the switch.
Book a free 30-minute call to discuss your business structure and find out exactly how much you could save.