“Should I stay an LLC or should I be an S corp?”
That question lands in every accountant’s inbox sooner or later—usually when a solo-owner LLC starts making real money and the self-employment tax bill suddenly feels painful. The short answer is: an S corporation can be a tax-saver, but only when the dollars you keep exceed the dollars (and time) you’ll spend on payroll, paperwork, and professional help. Let’s unpack that in plain English, using 2025 numbers.
How the IRS Treats a Garden-Variety LLC
By default, a single-member LLC is a “disregarded entity.” For tax purposes the IRS just sees you, reporting profit on Schedule C. Every cent of that profit is subject to self-employment tax: 12.4 percent Social Security (on the first $176,100 of profit in 2025) plus 2.9 percent Medicare, for a combined 15.3 percent. Social SecurityIRS
Earn more than $200,000? Tuck on an extra 0.9 percent “Additional Medicare” surcharge. IRS
That means a freelancer netting $80,000 will write a $12,240 self-employment-tax check before income tax is even calculated. Ouch.
What Changes When You Elect S Corporation Status
An S corp is still a pass-through entity, but the IRS forces you to slice profit into two buckets:
- Reasonable salary (runs through payroll, subject to the full 15.3 percent employment tax).
- Owner distributions (not subject to Social Security or Medicare tax).
If you can justify paying yourself, say, a $50,000 W-2 salary on $120,000 of profit, only that first fifty grand is hit with payroll tax. The remaining $70,000 lands on your personal return as K-1 income—subject to federal and state income tax, but free of the 15.3 percent self-employment layer.
On $70,000, that’s a potential $10,710 payroll-tax savings.
Where the Break-Even Line Usually Falls
Most advisors start to see the S-corp advantage once net profit tops roughly $50,000–$60,000. Below that, the annual cost of:
- Payroll software and quarterly filings
- Separate corporate tax return (Form 1120-S, due March 17 in 2025) IRS
- Bookkeeping rigorous enough to defend a “reasonable salary”
can wipe out the tax benefit. Over that profit level, the math tilts quickly in the S-corp’s favor.
A 2025 Back-of-the-Envelope Example
| Scenario | Net Profit | Payroll-Tax Hit | Payroll & filing costs* | Net Savings |
| LLC (Schedule C) | $120,000 | $18,360 | N/A | — |
| S corp (salary $50k) | $120,000 | $7,650 | ~ $3,000 | ≈ $7,700 |
*Typical small-business outlay for payroll software, W-2 prep, and Form 1120-S. Your mileage may vary.
The Catch: “Reasonable Salary” Isn’t a Free-For-All
The IRS never defines the magic number, but it does list factors: your role, time spent, industry norms, company profitability, and comparable wages. IRS
A rule of thumb many practitioners use: your salary shouldn’t drop below about one-third of total profit unless you have strong data to justify it. Skimp too hard and the IRS can reclassify distributions as wages—adding back payroll tax plus penalties and interest.
Formalities You Can’t Ignore
- Form 2553—file no later than 2 months + 15 days after the start of the tax year you want the election to take effect. Miss it and you’re into late-relief procedures. IRS
- Payroll cadence—yes, even if you’re the only employee.
- Corporate minutes & bylaws—lightweight for most single-member S corps but still required.
If you hate paperwork—or know you’ll skip it when crunch time hits—budget for professional help before making the switch.
LLC, S Corp, or Sole Prop: A Quick Side-by-Side
| Feature | Sole Proprietor | LLC (default) | LLC taxed as S corp |
| Legal liability shield | ❌ | ✅ | ✅ |
| Separate business tax return | ❌ | ❌ | ✅ (Form 1120-S) |
| Payroll required | ❌ | ❌ | ✅ |
| Self-employment tax on all profit | ✅ | ✅ | ❌ (wages only) |
| Owner draws taxed as dividends | ❌ | ❌ | ✅ |
| Record-keeping rigor | Low | Moderate | High |
When Sticking With the LLC Makes Sense
- Net profit is still modest (< $50k).
- You reinvest most earnings and take minimal draws.
- Administrative tasks make your eyes glaze over.
When It’s Time to Pull the S-Corp Trigger
- Profit consistently breaks $60k–$70k.
- You’re willing to run payroll (or pay someone to).
- You have clean books (or plan to).
- Future growth suggests hiring employees—payroll is coming anyway.
The Bottom Line
For many solo entrepreneurs, an LLC taxed as an S corporation becomes the most tax-efficient structure once the business is comfortably profitable. The trick is timing: convert after the potential savings outweigh compliance costs, but before another year of self-employment tax drains cash you could reinvest or take home.Still torn? Run the numbers with a CPA using your actual profit projections—not last year’s napkin math. If the forecast shows thousands in net savings and you’re ready to keep good records, elect the S corp and don’t look back. If not, give your LLC another season to grow—and revisit when the balance tips in your favor.
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