If you’re running a profitable small business, you’ve probably heard that an S-Corp election can save you money on taxes. And it can — but it’s not the right move for everyone, and the decision is more nuanced than most online articles let on.
Here’s a practical breakdown of the difference between an LLC and an S-Corp, and how to think about which structure makes sense for your situation.
The Basics: What’s the Difference?
An LLC (Limited Liability Company) is a legal entity that separates your personal assets from your business liabilities. By default, a single-member LLC is taxed as a sole proprietorship — meaning all your net profit flows to your personal return and is subject to both income tax and self-employment tax (15.3% on the first ~$168,000 of net earnings in 2024).
An S-Corp is a tax election, not a separate legal structure. You can elect S-Corp tax treatment for your LLC or corporation. The key benefit: as an S-Corp owner, you pay yourself a “reasonable salary,” and only that salary is subject to payroll taxes. The remaining profit passes through as a distribution — which is not subject to self-employment tax.
The Tax Math
Say you net $150,000 from your business. As a single-member LLC taxed as a sole proprietor, you’d owe self-employment tax on the full $150,000 — roughly $21,000.
As an S-Corp, you might pay yourself a reasonable salary of $80,000. Payroll taxes apply to that $80,000. The remaining $70,000 passes through as a distribution with no payroll tax — saving you roughly $10,000.
That’s the appeal. But the math only works if your savings exceed the added costs of running an S-Corp.
The Added Costs and Complexity of an S-Corp
An S-Corp requires payroll — which means payroll tax filings, quarterly deposits, and year-end W-2s. You’ll likely need payroll software or a service, and the administrative overhead is real. There are also additional state filing requirements in Texas and a more complex tax return (Form 1120-S).
As a general rule of thumb, the S-Corp election starts making financial sense when your net profit consistently exceeds $50,000–$60,000 per year. Below that threshold, the cost savings are often offset by the additional complexity and expense.
Which Is Right for You?
If you’re early stage, keeping things simple with an LLC is usually the right call. As your income grows, revisiting your structure should be a regular conversation with your CPA — ideally before year-end so you have time to make changes that take effect the following year.
The right answer depends on your net income, your industry, your other income sources, and your appetite for administrative complexity. It’s not a decision to make based on a blog post alone.
If you’re a small business owner in the Keller or Fort Worth area wondering whether your current structure is costing you money, let’s have that conversation.