The LLC vs. S-Corp question is one of the most common — and most consequential — decisions a small business owner makes. Get it right, and you could save $20,000 or more annually. Get it wrong, and you're leaving real money on the table.

Here's the direct answer: if your net profit from self-employment is above roughly $50,000–$60,000 per year, an S-Corp election almost certainly saves you more money than a single-member LLC taxed as a sole proprietor. Below that threshold, the complexity usually isn't worth it.

The Core Tax Difference

As a single-member LLC, all of your net profit is subject to self-employment (SE) tax — 15.3% on the first $168,600 (2026 threshold) and 2.9% on anything above that. On $150,000 in profit, that's roughly $21,000 in SE tax alone, before income tax.

With an S-Corp, you split your income into two buckets: a reasonable salary (which is subject to payroll taxes) and distributions (which are not). The savings come from not paying SE/payroll tax on the distribution portion.

Example: On $150,000 in net profit, you pay yourself a $75,000 salary and take $75,000 in distributions. You save payroll taxes on that $75,000 distribution — roughly $10,800 in savings, minus payroll processing costs of ~$1,500/year. Net savings: ~$9,300.

The S-Corp Tradeoffs

An S-Corp isn't free money — it comes with real obligations:

  • You must run actual payroll and pay yourself a "reasonable salary" — the IRS is watching
  • Additional compliance: Form 1120-S, payroll tax filings (940/941), W-2s
  • Extra cost: payroll processing + CPA time for the additional filings
  • Some states charge an S-Corp franchise fee (California: $800/year minimum)

When LLC (Sole Proprietor) Is Better

  • Net profit under $50,000/year
  • You're in a high-franchise-tax state (California, New York)
  • You want maximum simplicity and low overhead
  • You're in the early stages and revenue is unpredictable

When S-Corp Is Better

  • Consistent net profit over $60,000/year
  • You're already running payroll or plan to hire
  • You're comfortable with slightly more administrative complexity
  • You're in a low/no franchise tax state

The Timing Question

You can elect S-Corp status for an existing LLC by filing Form 2553. For the election to take effect in the current tax year, it must be filed within 2 months and 15 days of the start of that tax year — or at any time during the prior year. Miss the deadline, and your election doesn't take effect until the following year.

Advisory Monks Consulting handles Form 2553 elections and will model your specific situation to determine the exact savings before you make any changes.