S Corporation vs. LLC: Which Structure Saves You More in Taxes?
Choosing the right business structure is one of the most important financial decisions a business owner will make. Two of the most popular options are the Limited Liability Company (LLC) and the S Corporation (S Corp). Both offer liability protection and tax advantages—but which one actually saves you more in taxes?
The answer depends on your income level, business goals, and long-term strategy. At D Tax Accounting, we help business owners evaluate entity structures carefully to minimize IRS tax liability while staying compliant.
Let’s break down the key tax differences between an LLC and an S Corporation so you can determine which structure may benefit your business most.
Understanding the Basics
What Is an LLC?
A Limited Liability Company (LLC) is a flexible business structure that protects owners (members) from personal liability. By default:
A single-member LLC is taxed as a sole proprietorship.
A multi-member LLC is taxed as a partnership.
Profits pass through to the owner’s personal tax return.
The owner pays income tax and self-employment tax on net earnings.
LLCs can also elect to be taxed as an S Corporation if beneficial.
What Is an S Corporation?
An S Corporation is not a separate legal entity type—it’s a tax election made with the IRS. Businesses that qualify can elect S Corp status to change how profits are taxed.
With an S Corporation:
Owners are considered employees.
They must pay themselves a “reasonable salary.”
Salary is subject to payroll taxes.
Remaining profits are distributed as dividends, which are not subject to self-employment tax.
This difference is where potential tax savings occur.
The Key Tax Difference: Self-Employment Tax
For many business owners, the biggest difference between an LLC and an S Corp comes down to self-employment taxes.
LLC Taxation
In a standard LLC:
All net profits are subject to self-employment tax (Social Security and Medicare).
The self-employment tax rate is approximately 15.3% on eligible income.
If your business earns $100,000 in net profit, the entire amount may be subject to self-employment tax, in addition to income tax.
S Corporation Taxation
In an S Corp:
You pay yourself a reasonable salary (subject to payroll taxes).
Remaining profit is distributed as dividends (not subject to self-employment tax).
For example:
If your business earns $100,000:
You pay yourself a $60,000 salary (subject to payroll taxes).
The remaining $40,000 is distributed without self-employment tax.
This structure can potentially reduce your overall tax burden.
When an S Corporation May Save You More
An S Corporation often provides tax savings when:
Your net profits consistently exceed $60,000–$80,000.
You can justify a reasonable salary lower than total profits.
You are prepared to manage payroll compliance.
You want to reduce self-employment taxes legally.
The higher your profits, the greater the potential payroll tax savings.
However, S Corps also require:
Payroll processing
Additional tax filings
Strict compliance with IRS rules
Administrative complexity increases compared to a basic LLC.
When an LLC May Be the Better Option
An LLC may be better if:
Your profits are modest or inconsistent.
You are just starting your business.
You want minimal administrative requirements.
You prefer operational simplicity.
For newer or lower-profit businesses, the cost of payroll services and compliance for an S Corp may outweigh tax savings.
Administrative and Compliance Differences
LLC Simplicity
Fewer formal requirements
No mandatory payroll (unless hiring employees)
Simpler tax filings
S Corporation Requirements
Must run payroll for owner
File corporate tax return (Form 1120-S)
Issue W-2 to owner
Maintain corporate formalities
Justify reasonable salary
Improper S Corp management can trigger IRS scrutiny, especially regarding reasonable compensation.
The Importance of “Reasonable Salary”
The IRS requires S Corp owners to pay themselves a reasonable salary based on:
Industry standards
Duties performed
Experience level
Business profitability
Setting an unreasonably low salary to avoid payroll taxes can lead to penalties and reclassification by the IRS.
Proper planning and documentation are essential.
Other Tax Considerations
Beyond self-employment tax, consider:
Qualified Business Income (QBI) Deduction
Both LLCs and S Corps may qualify for the Section 199A deduction, allowing up to a 20% deduction on qualified business income (subject to limits).
State Taxes
Some states impose additional fees or franchise taxes on S Corporations. State-level impact should be reviewed carefully.
Retirement Contributions
S Corp owners may have different retirement planning strategies compared to LLC members.
Growth Plans Matter
Your future plans also influence the decision:
Planning to reinvest profits?
Bringing in partners or investors?
Expanding to multiple states?
Selling the business in the future?
The right structure should align with long-term business goals—not just short-term tax savings.
Can You Switch Later?
Yes. Many businesses begin as LLCs and later elect S Corporation status when profits increase.
This flexibility allows business owners to:
Start simple
Transition when tax savings justify the change
Adapt as the business grows
Proper timing of the election is crucial to avoid missed deadlines or compliance issues.
How D Tax Accounting Helps You Decide
Choosing between an LLC and S Corporation is not a one-size-fits-all decision. At D Tax Accounting, we:
Analyze your net income and projections
Calculate potential tax savings
Evaluate payroll requirements
Review state tax implications
Ensure full IRS compliance
We focus on proactive tax planning—helping you structure your business in a way that supports growth while minimizing IRS tax exposure.
Final Thoughts
So, which structure saves you more in taxes—S Corporation or LLC?
If profits are higher and consistent, an S Corp may reduce self-employment taxes.
If simplicity and flexibility matter most, an LLC may be ideal.
The right choice depends on income, goals, and compliance readiness.
The key is not just saving taxes today—but building a structure that supports long-term financial success.
Not Sure Which Structure Is Right for You?
If you’re forming a new business or considering switching from an LLC to an S Corporation, D Tax Accounting can help you make the right decision.
Contact us today to schedule a consultation and discover which business structure will save you more in taxes—while keeping you fully compliant with IRS regulations.
