Business structure decisions tend to get made once, early, and then never revisited — which is a problem, because the right structure at $50,000 in profit isn't always the right one at $150,000. The difference between an LLC and an S-corp election isn't just paperwork; it directly changes how much of your profit goes to self-employment tax.
How an LLC is taxed by default
A single-member LLC is taxed as a sole proprietorship by default — profit passes through to your personal return, and all of it is subject to self-employment tax, currently 15.3%, on top of regular income tax. There's no separation between "salary" and "profit" — it's all treated the same way.
What an S-corp election changes
Electing S-corp status (which an LLC can do without changing its legal structure) lets you split your income into a reasonable salary, subject to payroll tax, and remaining profit taken as a distribution, which isn't subject to self-employment tax. For owners with enough profit, this split can mean real tax savings.
Where the tradeoff actually lives
S-corp status isn't free — it adds payroll processing, a separate tax return, and stricter recordkeeping requirements, all of which cost time or money to maintain properly. Below a certain profit level, those added costs can outweigh the self-employment tax savings; above it, the math usually flips in the S-corp's favor.
"Reasonable salary" is the part that gets people in trouble
The IRS requires S-corp owners to pay themselves a reasonable salary for the work they do, based on what the role would normally pay — not an artificially low number designed purely to shrink payroll tax. Setting this wrong is one of the more common triggers for an audit of S-corp filers specifically.
None of this is a decision to make from a blog post alone — it depends on your specific profit, industry, and plans for the business. If you're weighing the switch, our free quarterly tax calculator is a reasonable starting point for estimating what either structure would actually cost you, and quarterly estimated taxes work a bit differently once you're taking a salary. S&C Bookkeeping can walk through the numbers with you — get in touch before you file the election, not after.