Daperis CPALLC vs. S Corp: Which Structure Actually Saves You Money
"Should I be an LLC or an S corp?" is the wrong question, and I hear it pretty often. An LLC is a legal structure. An S corp is a tax election. They're not the same kind of thing, which is exactly why the question trips people up. A single-member LLC can choose to be taxed as an S corporation without changing anything about its legal structure. What people actually mean is: should my business keep paying self-employment tax on everything it makes, or should I make this election to cut that down.
Like most things when it comes to taxes: it depends. Specifically, it depends on your numbers, not a rule of thumb from a Google search. You need to approach it holistically, looking at your Federal, State, Local, self-employment tax, additional compliance costs, and the QBI deduction. Depending on the state you operate, you may even have additional taxes as an S-Corp.
What Does the Baseline Look Like?
As a sole proprietor or a default LLC, every dollar of profit gets hit with self-employment tax, 15.3% for Social Security and Medicare, on top of regular income tax.
What Changes With the Election
Elect S-corp treatment and that profit splits into two buckets. You set a salary, run it through actual payroll, and that portion pays the full 15.3% either way, same as before. Whatever's left comes out as a distribution, and that part skips the 15.3% completely. It's still taxed as regular income, just without the extra hit.
Here's what that looks like with real numbers instead of a rule of thumb. Say the business clears $150,000 in profit (round number, for illustration, your actual results may vary and will absolutely make your accountant's day more interesting). As a sole proprietor, the full $150,000 gets the 15.3% treatment. Elect S-corp status, set a reasonable salary of $80,000, and the remaining $70,000 comes out as a distribution instead, dodging that 15.3% entirely. The savings in this example come entirely from that $70,000. That's the whole mechanism. Everything else in this article is about what limits it or costs against it.
Your Salary Has to Be Real
You can't just pick whatever number saves the most tax. Your salary needs to reflect what someone else would actually get paid to do your job in your market. The IRS has gone after S-corp owners who paid themselves too little and took oversized distributions instead, sometimes reclassifying the whole thing as wages after the fact, with back taxes and penalties riding along. Base the number on what the role actually pays, and keep the records to prove it.
Before you think the fix is just paying yourself more, that's its own mistake. Every dollar above a defensible salary costs you payroll tax for nothing, and it can shrink your QBI deduction, which is worth understanding on its own.
More than Taxes
Running an S corp means running actual payroll: registering as an employer, handling payroll taxes on schedule, filing quarterly payroll returns, issuing a W-2, on top of a separate corporate tax return. None of that is optional once you elect S-corp treatment, and none of it is free. At lower profit levels, this cost can eat up most or all of the tax savings, which is exactly why this election tends to make sense above a certain profit level and not below it, generally somewhere north of $60,000 to $80,000 in profit for most solo operators, though your real breakeven depends on your actual numbers. Measure your savings against what it costs to run this properly, not against the best-case number from a YouTube video.
The Deduction People Forget: QBI
The Qualified Business Income deduction can reach 20% of business income, but it gets limited at higher income levels based on how much W-2 wages the business actually pays. A sole proprietor with no wages can lose the whole deduction once income crosses a certain threshold. An S-corp owner, because they're already running payroll and paying themselves a salary, often keeps some or all of that deduction at the same income level. For a high earner, this can matter just as much as the self-employment tax savings, and it almost never comes up in the conversation, mostly because it's less commonly understood. We mentioned it before, but you want to look at your total tax liability combined. Sometimes, it's worth it to pay more taxes to your State if you can pay less taxes Federally. That brings us to our next point:
If You're in New York City
NYC layers its own cost on top of the federal math. They treat S-Corps as a C-Corp, which means you're subject to the General Corporation Tax. If you have an LLC, you're subject to the Unincorporated Business Tax, which has its own separate rules. This is why it's especially important to work with a tax pro that understands your personal situation. If you're making an S-election based on a standard article you find online or based on generic advice, you could be increasing your tax bill. We have an article here explaining the nuances of an S-Corp in NYC, as well as a case study showing that sometimes, an S-Corp election can make sense in NYC.
Don't Forget the Deadline
None of this matters if you miss the window to actually make the election. To start S-corp treatment this year, an existing business generally needs to file Form 2553 by March 15. Miss it, and you're paying self-employment tax on everything for another full year, no exceptions. A brand-new business gets a bit more time, roughly two and a half months from formation. This catches people constantly because the S-corp conversation usually happens in the spring at tax time, months after the window has already closed. S-Corp Election (Form 2553): Requirements and Deadlines covers exactly what the form requires if you're ready to file.
So, Which One Should You Pick?
If you're new and profit is modest, stay simple with an LLC taxed the default way, and revisit this once the numbers actually justify the added cost. If you're already running a profitable LLC and self-employment tax is eating a real chunk of your income every year, that's the signal to run your own numbers on the S-corp election. Run the math on your actual profit, your actual defensible salary, and your actual state and check it again as the business changes instead of deciding once and forgetting about it.
Disclaimer: This article is for educational and informational purposes only and is not intended as financial, investment, legal, or tax advice. The author assumes no liability whatsoever in connection with its use. This content is not an exhaustive explanation of any topic, practice or process. You should always seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.