LLC vs S-Corp: When Does S-Corp Election Make Sense?
An S-Corp is not a separate business entity — it is a tax election you layer onto your existing LLC. By paying yourself a reasonable salary and taking the rest as a distribution, you avoid self-employment tax on the distribution portion. The math works in your favor once annual net profit exceeds approximately $60,000–$80,000.
By Edmond Hui · Last updated: January 2026
LLC vs S-Corp: Side-by-Side Comparison
| Factor | Default LLC | LLC with S-Corp Election |
|---|---|---|
| Legal entity | Separate legal entity | Tax election on an LLC or corporation — not a separate entity |
| Liability protection | Yes — personal assets protected | Yes — same protection as LLC (it is the same LLC) |
| Default federal taxation | Disregarded entity / pass-through | Pass-through, but income split into salary + distributions |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only — distributions exempt |
| Payroll requirement | None | Must pay yourself a "reasonable salary" via payroll |
| Payroll costs | None | $500–$2,000/yr for payroll service + employer taxes |
| Formation cost | $35–$500 state filing fee | Same (S-Corp is an IRS election, not a state filing) |
| IRS filing requirement | Schedule C or Form 1065 (multi-member) | Form 1120-S annually + W-2 for each owner-employee |
| Breakeven profit threshold | N/A | Typically $60,000–$80,000+ annual net profit |
| Shareholder restrictions | No restrictions on members | Max 100 shareholders; no non-US citizens; one class of stock |
Frequently Asked Questions
What is the difference between an LLC and an S-Corp?
An S-Corp is not a separate business structure — it is a tax election you make with the IRS. Your LLC remains an LLC under state law. The difference is in how the IRS taxes you: a default single-member LLC pays 15.3% self-employment tax on all net profit. An LLC with S-Corp election splits income into a salary (subject to SE tax) and distributions (exempt from SE tax), reducing your total tax bill once profits exceed approximately $60,000–$80,000 per year.
When should an LLC elect S-Corp status?
S-Corp election typically saves money when your LLC's net profit exceeds $60,000–$80,000 per year. Below that threshold, the cost of running payroll ($500–$2,000/yr), filing Form 1120-S, and paying an accountant to manage the more complex return often exceeds the SE tax savings. The exact breakeven depends on your state, your salary, and your accountant's fees.
How do I elect S-Corp status for my LLC?
File IRS Form 2553 with the Internal Revenue Service. You must file within 75 days of forming your LLC, or by March 15 of the tax year for which you want the election to be effective. Late election relief is available in many cases. Your LLC then files Form 1120-S annually and you receive a W-2 as an employee of your own company.
Does S-Corp election change my state taxes?
It depends on your state. Most states recognize the federal S-Corp election and tax S-Corps as pass-through entities. Some states (California, New York, New Jersey, Connecticut) impose additional S-Corp fees or taxes. California charges an S-Corp minimum franchise tax of $800 plus a 1.5% net income tax, which can reduce the federal SE tax savings for California LLC owners.
Can I switch back from S-Corp to LLC taxation?
Yes. You can revoke the S-Corp election by filing a statement of revocation with the IRS signed by shareholders holding more than 50% of the shares. The LLC returns to its default tax classification. Revoking mid-year has income allocation implications, so consult a tax professional before revoking.
LLC vs S-Corp by State
State franchise taxes and fees affect the S-Corp breakeven threshold. See your state-specific guide below.