Hey there y'all! I hope everyone is doing well today.
I want to talk about the LLC versus S-corp question...I know, I know - stick with me. It's probably the single most common question I get from people in their first couple of years, and it usually arrives sounding like a fork in the road. Which one should I be? Which one saves more? Did I pick wrong?
And every time I answer it I get a little better at explaining it (at least I hope so). So here's this round's attempt.
Here's the thing, and I want to say it plainly right up front because it saves everybody a lot of anxiety.
They are not two options. You are not choosing between them.
An LLC is a thing you register with your state. Its entire job is legal - it puts a line between your business and your personal stuff, so that if the business gets sued or owes money, your house and your savings are on the other side of that line. It says nothing whatsoever about how you're taxed...that's a separate conversation entirely.
An S-corp is not a business structure at all. It's a tax election. It's a form you file with the IRS - Form 2553 - telling them to tax your existing business a different way.
So an LLC that has made the S-corp election is a completely normal thing to be. You get the legal line and the tax treatment. You didn't have to trade one for the other.
That's the whole confusion. Everything else is about timing.
And timing is the part actually worth your attention, so here's where we're going. First, what the election actually changes about your tax bill, with real math instead of a percentage. Then what it costs, because it does cost something and most articles about this skip that part entirely. And then how to tell whether you're at the point where it makes sense, which is a more honest question than "which one is better." Five more minutes.
One: what the election actually changes
By default, if you're a single-member LLC, the IRS mostly ignores the LLC for tax purposes. Your profit goes on Schedule C, and self-employment tax applies to it.
Self-employment tax is 15.3 percent - 12.4 percent for Social Security and 2.9 percent for Medicare - and it's calculated on 92.35 percent of your net earnings. That 92.35 percent matters, and it's the piece almost every article on this topic quietly skips...so let me actually use it.
Say your business nets $150,000. Self-employment tax applies to about $138,500 of that. The Social Security piece runs on earnings up to $184,500 for 2026, so you're fully inside it, and the Medicare piece has no ceiling at all. Run the math and you're at roughly $21,200 in self-employment tax, before any income tax.
Now elect S-corp and pay yourself a reasonable salary. Say that salary is $85,000, honestly built and documented. Payroll tax applies to the $85,000. The remaining $65,000 comes to you as profit, and it doesn't carry payroll tax.
The payroll tax on $85,000 is about $13,000. So the difference is somewhere in the neighborhood of $8,000.
That's a real number, and it's why people make this election.
Two: what it costs, which nobody tells you
But that $8,000 is a gross number, and the honest version of this conversation subtracts things from it.
You now have to run actual payroll, which means a payroll service, which runs a few hundred to a couple thousand dollars a year depending on who you use. You now have to file a second tax return - the 1120-S for the business, separate from your personal 1040 - and that costs whatever your preparer charges. Mine is $325, and it's on the pricing page, because I think you should be able to see that before you call.
You may also owe more at the state level, and this varies enormously - some states have franchise taxes or don't fully recognize the federal election, and that can move the math meaningfully.
Add it up and you're realistically giving back a couple thousand dollars of that $8,000 to keep the structure running. That's fine when the number is $8,000. It's not fine when the number is $1,500...at that point you've bought yourself a part-time job.
Which is exactly why the real question isn't which one is better.
Three: the question that actually decides it
Here's how I'd think about it, in order.
Do you have liability exposure? Clients on contracts, employees, a physical space, equipment, anything where somebody could reasonably come after you. If yes, the LLC conversation is worth having on its own merits, entirely separate from taxes. That one's often a lawyer conversation more than an accountant one.
Is your net profit consistently high enough that the savings clear the costs? Note the word consistently. One good year isn't a structure decision...two or three in a row starts to be. Somewhere in the range where your profit is meaningfully above what you'd have to pay yourself as a salary is where this starts to work, because that gap is the only part that saves anything.
Can you actually carry the compliance? Payroll every month. A second return every year. A salary number you could defend. If that's going to be the thing that quietly doesn't get done, then staying on the default treatment is a completely legitimate choice...and not a failure.
That third one is the one I'd underline. I have watched people make this election, not run payroll all year, and end up in a worse position than if they'd never elected at all. The structure only pays you back if you actually operate it.
And if you're reading this thinking you should have done something two years ago - you're not behind. The election is available going forward, an existing LLC can make it, and there's relief available in a lot of late-filing situations. This is a fixable category of problem.
What to do this week
Open your last two tax returns and write down your net business profit for each year. Just the two numbers, on paper.
If they're both comfortably above what you'd have to pay yourself to do your own job, you've got a real question worth running the numbers on. If they're not, you have your answer for now and you can stop wondering about it.
That's a five-minute exercise that resolves a question a lot of people carry around for months. And if the two numbers are close to the line, that's exactly the kind of thing worth walking through together rather than guessing at.
This is education, not advice, and reading it doesn't make you a client. And if you already are a client - this kind of general writing sits outside our engagement. Your engagement covers your return, your books, your situation. This covers everybody's, which means it can't really cover yours. So before you act on any of it, reach out and let's talk about your actual numbers. That's what the individual advice is for. Information current as of August 2026.
Where I'm getting this: IRS, Self-Employment Tax · SSA, Contribution and Benefit Base · IRS, About Form 2553 · IRS, Single Member Limited Liability Companies · IRS, S Corporation Compensation and Medical Insurance Issues
Varde Financial, LLC · Abel Scott, EA · vardefi.com
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