A single-member LLC is a legal structure, not a tax classification. By default, the IRS treats it as a sole proprietorship. All net business income flows to your personal return and is subject to self-employment tax at 15.3% on 92.35% of net profit, plus regular income tax on top of that.
Forming an LLC does not change your tax situation. It provides liability protection, not a tax benefit.
An S-Corp election (filed via Form 2553) is a tax classification change, not a new legal entity. Once elected:
S-Corps do not have self-employment tax. The savings comes from the distribution escaping payroll taxes.
Side-by-side comparison at $120,000 net income, $60,000 reasonable salary:
LLC: SE tax of approximately $16,955 (15.3% on 92.35% of $120,000)
S-Corp: FICA on $60,000 salary = $9,180. Distribution of $60,000 = $0 payroll tax.
Gross payroll tax savings: approximately $7,775. Net savings after overhead: varies by state and cost structure.
The gross savings above does not account for the real costs of running an S-Corp:
Total overhead typically runs $1,500 to $4,000 per year depending on your setup. That is the number you need to clear before the election saves anything.
Net profit needs to exceed approximately $60,000 to $80,000 consistently before the S-Corp election makes financial sense after overhead. Below that threshold, the costs typically outweigh the savings. Use our S-Corp vs. LLC calculator to run the numbers for your specific income and salary level.
The 20% qualified business income deduction (currently scheduled to expire after 2025 unless extended by Congress) applies to both sole proprietors and S-Corp owners, with some nuance for higher-income service businesses. Because QBI affects your taxable income, it also affects the net savings calculation. This is one more reason to run your specific numbers rather than rely on a general rule.
We will tell you whether the S-Corp election makes sense and handle the transition if it makes sense.
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