How Much Can You Save if Your LLC is Taxed as an S Corp?

For many profitable limited liability company (LLC) owners, the biggest surprise at tax time is how much of their earnings go straight to the IRS through self-employment taxes. There’s a lesser-known option that can significantly reduce that burden: electing to have your LLC (a legal structure) taxed as an S corporation (a tax status). This move can unlock thousands of dollars in tax savings each year while also positioning your business with a stronger financial infrastructure that supports your long-term growth ambitions.

In this guide, we’ll explain how S corp taxation works, when it makes sense, and how to calculate your potential savings. We’ll also cover the compliance steps, pros and cons, and advanced considerations so you're equipped to make an informed decision.

Key Highlights

• An LLC taxed as an S corp can help owners reduce self-employment taxes by splitting income into salary and distributions.

• You’ll need to pay yourself a “reasonable salary” and run payroll, which adds administrative responsibility.

• Tax savings generally become worthwhile once profits exceed around $40,000 annually, though every situation is unique.

• Ongoing compliance—such as payroll taxes, IRS 1120-S, U.S. Income Tax Return for an S Corporation, and shareholder Schedule K-1s—is essential to maintain S corp benefits.

• Choosing S corp taxation can be a strategic growth move, not just a tax shortcut, especially when paired with expert advisory support.

What Is an LLC Taxed as an S Corp?

Differences in How LLCs and S Corps Are Taxed

By default, a single-member LLC, known as a disregarded entity, is taxed like a sole proprietorship, with the owner being a sole proprietor, while a multi-member LLC files taxes like a partnership. In both cases, all net profits flow through to the owners’ personal federal income tax returns and are subject to income tax plus the 15.3% self-employment tax.

An S corporation, however, is not a separate business entity type—it’s a tax status elected with the IRS. Both LLCs and S corps are pass-through entities, meaning that profits still flow through to the owners’ personal tax returns.

The key difference lies in how those profits are classified and taxed.

Key Change When an LLC Becomes an S corp: Member Draws to Salary and Distributions

The S Corp entity classification election is a change in how the IRS views your LLC for tax purposes, not a change in its legal structure. An LLC's personal liability protection and operational flexibility remain intact after the switch, while avoiding the double taxation of a C corp.

When an LLC elects S corp status, owners must start paying themselves a reasonable salary through payroll. This salary is subject to Social Security and Medicare taxes. However, any profits left after salary can be distributed, and those are not subject to self-employment tax.

This distinction is the core of the S corporation tax savings strategy: only your salary is subject to payroll taxes, while your remaining profit is exempt from the 15.3% tax rate.

Calculating Potential Self-Employment Tax Savings

Let’s compare a simple example illustrating the substantial tax savings of switching to S corporation status:

• Default LLC: $100,000 profit → entire amount taxed for income + self-employment taxes. That’s roughly $15,300 in self-employment tax alone.

• LLC taxed as S Corp: Owner pays himself a $60,000 salary (taxed for payroll taxes) and takes $40,000 as distributions. Payroll taxes apply only to the $60,000, resulting in about $9,180. That’s a savings of more than $6,000.

The higher your profits, the more meaningful these savings become.

👉 Want to see your personalized estimate? Schedule a free tax savings consultation with 1-800Accountant.

Is S Corp Election Right for Your LLC? Key Considerations

The Profitability Threshold: When Should an LLC Make an S Corp Election?

Generally, businesses should consider an S corp election when annual profits exceed $40,000 to $60,000. At lower profit levels, the added costs of payroll and compliance may cancel out the savings.

The income threshold is not a strict requirement. Personalized analysis of your business's specific financial situation will help determine the best time to convert. 

Meeting IRS Eligibility Requirements

While the income threshold isn't a strict rule, the IRS sets strict requirements for businesses seeking S corp status, including:

• Must be a U.S.-based entity

• No more than 100 shareholders

• Shareholders must be individuals or certain trusts/estates (no partnerships or corporations)

• Only one class of stock

Complying with the “Reasonable Salary” Requirement 

The IRS requires owner-employees to pay themselves a salary that matches what someone with similar duties would earn in the open market. Setting your salary too low risks triggering an IRS audit, which underscores the importance of documenting your decision-making process to withstand IRS scrutiny.

Factors to weigh as you determine a reasonable salary include:

• Job responsibilities

• Industry pay standards

• Company profitability

This is where proactive guidance matters. 1-800Accountant’s year-round tax advisory helps clients determine and defend their salary, adjusting as the business grows to ensure compliance.

How to Make the S Corp Election and Stay Compliant

Filing Form 2553

To elect S corp status, LLCs must file IRS Form 2553, Election by a Small Business Corporation. Timing matters: it must be filed within 2 months and 15 days of the start of the tax year, though late elections may be accepted with reasonable cause.

Reasonable cause means your business has a valid explanation for the late filing. Professional guidance is often necessary to craft a compelling reasonable cause argument.

Establishing Formal Payroll

Setting up and running a formal payroll system is costly and time-consuming, especially for solo business owners who already wear many hats.

Once elected, you must run payroll to pay yourself that reasonable salary. Payroll requires calculating withholding taxes, remitting them to the IRS, and filing quarterly returns. Many small business owners outsource this to providers like 1-800Accountant’s full-service payroll to reduce errors while maintaining focus on their new S corp. 

Ongoing Annual Compliance Requirements

After becoming an S corp, you’ll shift from filing a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to filing Form 1120-S, with each shareholder receiving a Schedule K-1.

Accurate bookkeeping is essential for tracking salaries versus distributions for income tax purposes, making professional bookkeeping support invaluable as your operations expand.

Weighing the Pros and Cons: A Balanced View

Key advantages of an S corp election

For most business owners, the primary benefit of electing S corp status is the potential for significant savings on self-employment taxes. The business structure creates a clear, formal distinction between salary and business profit.

Key S corp advantages: 

• Significant self-employment tax savings

• More professional financial structure (salary vs. distributions)

• Potential eligibility for the 20% Qualified Business Income (QBI) deduction

Potential disadvantages and added complexities

While electing S corp status can trigger substantial tax savings, it also comes with increased administrative costs and complexities. 

• Added costs for payroll, bookkeeping, and business tax preparation

• Increased IRS scrutiny on reasonable salaries

• Stricter rules for profit distributions

• State-specific rules (some states do not recognize S corp status)

These complexities make professional tax preparation from 1-800Accountant vital to staying compliant and maximizing deductions.

Advanced Topics and Strategic Planning

The QBI Deduction

As pass-through entities, S corps may qualify for the 20% QBI deduction, a significant reduction in taxable income. However, eligibility is subject to income thresholds and your industry.

Planning for the long term: Entity structure and exit strategy

Electing S corp status isn’t just about saving taxes this year—it can strengthen your business in the long-term, including: 

• Your financial infrastructure for growth

• Attract investors

• Prepare for an eventual exit

For many, it’s a stepping stone toward “graduating” their business from side hustle to scalable enterprise. For tailored guidance, 1-800Accountant’s entity formation services ensure your structure supports both immediate savings and future plans.

Make the Right Choice with Expert Guidance from 1-800Accountant

Choosing S corp taxation should align with your business's long-term vision, but it's not a one-size-fits-all solution. The optimal entity structure selection should consider your:

• Profitability

• Goals

• Compliance capacity

With 1-800Accountant, America's leading virtual accounting firm, you gain a dedicated partner to handle everything from the initial entity structure election and payroll setup to ongoing tax advisory services, ensuring year-round compliance while maintaining S corp eligibility.

👉 Schedule your free consultation today to see how much your business can benefit from operating as an S corporation.

S Corporation Taxation FAQs

How are S corp distributions taxed?

Distributions are not subject to self-employment taxes; however, they are taxed as ordinary income. This is the primary driver of S corp savings.

Are S corps eligible for additional tax write-offs?

Yes. S corps can deduct many of the same expenses as other businesses, such as salaries, health insurance, and retirement contributions.

What are the shareholder limits for S corps?

An S corp can have no more than 100 shareholders, and all must be U.S. individuals or qualifying trusts/estates.

Are there different states where S corps have a better advantage?

States that conform closely to federal tax rules often simplify compliance. For example, Texas and Florida do not impose personal income tax, which may enhance overall savings.

Are there states where S corps are at a disadvantage?

Yes. States like California impose a 1.5% franchise tax on S corps in addition to federal obligations, which may reduce the net tax benefit.

Can I form an S corp in a different state to the one where I do business?

Generally, no. You must register in the state where you operate, even if you form elsewhere, which may result in additional fees and complexity.

Are S corps always pass-through entities?

Yes. By definition, S corps are pass-through entities, with income taxed at the shareholder level rather than the corporate income tax level. C corporations are taxed at both levels, which is called double taxation. 

How can I decide on a 'reasonable salary'?

Benchmark your role against industry data, job boards, or compensation surveys. Professional advisory support can help you document and defend your chosen salary. Be prepared to adjust your salary as your business and responsibilities evolve. 

How often can I change my 'reasonable salary'?

You can adjust your salary as your business changes, but it should remain defensible. Annual reviews are common to ensure compliance.