The question comes up constantly. Should I be an LLC or an S-Corp? And the honest answer is that it depends — but not in the vague, unhelpful way that answer usually gets delivered.
Here's the actual framework for thinking through it.
First, Understand What You're Actually Comparing
When people ask "LLC or S-Corp" they're usually not asking about the legal entity. They're asking about the tax treatment.
An LLC is a legal structure. How it gets taxed depends on how many members it has and whether you've made any elections. A single-member LLC, by default, is taxed as a sole proprietorship — meaning all the profit flows to your personal return and you pay self-employment tax on all of it.
An S-Corp is a tax election, not a separate legal entity. You can have an LLC that's taxed as an S-Corp. Many people do. When people say "I'm thinking about becoming an S-Corp," what they usually mean is "I'm thinking about filing Form 2553 to have my LLC or corporation taxed under Subchapter S."
So the real question is: should your business be taxed as a sole proprietorship — the default — or as an S-Corp?
How the Default Taxation Works
As a sole proprietor or single-member LLC with no S-Corp election, every dollar of net profit flows to your personal tax return as self-employment income.
Self-employment tax is 15.3 percent on net earnings up to the Social Security wage base — $184,500 in 2026 — and 2.9 percent on everything above that. This covers both the employee and employer portions of Social Security and Medicare. When you work for someone else, your employer pays half of this. When you work for yourself, you pay both halves.
On $100,000 of net profit, self-employment tax alone is $14,130. Then you pay federal income tax on top of that.
Whether an S-Corp election saves you money comes down to your actual profit and salary. We'll run the comparison with your numbers.
How S-Corp Taxation Works
An S-Corp changes the structure of how you pay yourself — and that's where the tax savings come from.
As an S-Corp owner, you split your income into two buckets. First, you pay yourself a reasonable salary as a W-2 employee of your own company. Payroll taxes — Social Security and Medicare — apply to that salary. Second, any remaining profit gets distributed to you as a shareholder distribution. Distributions are not subject to self-employment tax or payroll taxes.
On $100,000 of net profit with a $60,000 reasonable salary: - Payroll taxes apply to $60,000 — roughly $9,180 - No payroll or self-employment tax on the $40,000 distribution - Compare to $14,130 in self-employment tax on the full $100,000 as a sole prop
That's roughly $5,000 in annual savings on this example. At $150,000 in net profit with an $80,000 salary the savings get larger. At $200,000 they get larger still.
The Costs You Have to Factor In
S-Corp status isn't free. The savings are real but so are the added costs, and you need to run the actual math for your situation.
Payroll. You have to run payroll for yourself — at minimum once a quarter, ideally more frequently. You'll need a payroll service, which is an added monthly cost.
A separate S-Corp tax return. Form 1120-S has to be filed for the entity every year, separate from your personal 1040. At PBX, S-Corp returns start at $1,350 — see our business tax pricing. That's on top of your personal return.
The compliance overhead. Reasonable compensation documentation, shareholder basis tracking, reconciling the corporate return with your personal return — this adds complexity that your accountant has to manage.
Add it up and operating as an S-Corp carries real additional annual costs compared with a simple sole proprietorship. The S-Corp election only saves you money when the payroll tax savings exceed those costs.
When the S-Corp Election Makes Sense
An S-Corp election starts making financial sense when your net annual profit is consistently high enough that the payroll tax saved clearly exceeds those added costs.
Below that threshold, the payroll tax savings are smaller than the compliance costs. That's not a trade worth making.
The exact number depends on what reasonable compensation looks like for your role — because the salary level directly determines how much of your income is subject to payroll taxes. Higher salary means more payroll tax. Lower salary means more audit risk. The right number sits in the defensible range for your work, your industry, and your revenue.
The QBI Deduction Wrinkle
If you're a sole proprietor, the qualified business income deduction — the 20 percent deduction on qualified business income — can offset some of the self-employment tax disadvantage. The QBI deduction is calculated on your net self-employment income, and W-2 wages paid through an S-Corp reduce the QBI deduction base.
The interaction between the QBI deduction and S-Corp savings is genuinely complex. For some businesses in some brackets it shifts the math meaningfully. This is worth modeling rather than generalizing.
Timing the Election
If you decide an S-Corp election makes sense, the election generally needs to be filed by March 15 of the year you want it to take effect. There are late-election relief procedures, but they require explanation and IRS approval.
Planning ahead matters here. The election isn't the hard part. Getting payroll set up, establishing a reasonable salary, opening the right accounts — that takes time to do correctly. Mid-year is a reasonable time to start this conversation so it can be implemented properly by January 1.
Before we recommend either structure, we model both at multiple income levels. The S-Corp savings are real for the right businesses at the right income levels, and so are the costs and complexity — which is why your specific numbers decide it, not a general rule.