S-Corp vs LLC: The Real Math Behind Choosing Your Entity Type

If you're a single-member LLC making more than $80,000 in net income, you're paying approximately $12,240 per year in self-employment tax that you might not have to pay. The fix? An S-Corp election.

But "just switch to S-Corp" isn't as simple as social media makes it sound. Let's do the real math.

How Self-Employment Tax Works

As a single-member LLC, all your net income is subject to self-employment (SE) tax at 15.3% (12.4% Social Security + 2.9% Medicare). On $200K net income, that's $28,278 in SE tax alone — on top of your income tax.

How an S-Corp Changes the Math

An S-Corp splits your income into two buckets:

Reasonable salary (W-2): Subject to payroll tax (15.3%)
Distributions (K-1): NOT subject to payroll/SE tax

The key: only the salary portion gets payroll-taxed. The distributions pass through tax-free from a payroll perspective.

The Real Math at $200K Net Income

	LLC	S-Corp ($80K salary)
Net Income	$200,000	$200,000
Salary (W-2)	N/A	$80,000
Distributions	N/A	$120,000
SE / Payroll Tax	$27,174	$12,240
Annual Savings	—	$14,934

💡 The savings come from distributions. The $120,000 you take as distributions avoids the 15.3% SE tax entirely. That's $18,360 that stays in your pocket.

When Does S-Corp Make Sense?

Net Income	SE Tax (LLC)	Payroll Tax (S-Corp)	Annual Savings
$50,000	$7,065	$7,065	$0 (not worth it)
$80,000	$11,304	$9,180	$2,124
$150,000	$20,093	$10,710	$9,383
$200,000	$27,174	$12,240	$14,934
$500,000	$31,494	$15,300	$16,194

The sweet spot: $80,000+ in consistent net income. Below that, the extra costs of running payroll, filing an 1120-S, and maintaining S-Corp compliance eat into the savings.

The Hidden Costs of S-Corp

S-Corp saves money, but it costs money too:

Payroll service: $50-150/month (Gusto, ADP)
1120-S tax return: $500-1,500/year (CPA preparation)
Reasonable compensation risk: IRS scrutinizes low salaries
Quarterly payroll taxes: Must file 941s quarterly
State requirements: Some states impose additional S-Corp taxes

⚠️ The #1 S-Corp audit trigger: Paying yourself $0 salary while taking large distributions. The IRS requires "reasonable compensation" for the work you perform. A general rule: salary = 40-60% of net income for service businesses.

How To Make the Switch

File Form 2553 with the IRS (due March 15 for existing entities, or within 75 days of formation)
Set up payroll through a provider like Gusto
Pay yourself a reasonable salary via regular paychecks with withholding
Take remaining profits as distributions (no payroll tax)
File Form 1120-S annually (due March 15)

The math is clear above $80K. But always consult with a CPA for your specific situation — state taxes, QBI deductions, and your particular business structure all affect the final numbers.

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